You may have a client - or several - who originally purchased a large life policy to financially protect their spouse, provide for their child, or help facilitate a smooth transition of their business in the event of the client's death. But now the spouse is the ex-spouse, the adult child earns more than their parent, or the client's business has been sold.
Circumstances change. However, your relationship as a trusted advisor to these clients doesn't have to. It may sound contrarian, but sometimes the best advice an agent can give is to sell -- not buy -- a life insurance policy. A life settlement can often be a beneficial and logical solution for clients who no longer need or want their life policy, as well as for the agent who discusses with their client of the available options to do just that.
One offering to help the client deal with an unneeded or unwanted policy are life settlements, a market that currently yields billions of dollars in death benefits for institutional advisors.
When is it in your client's best interest to sell a life insurance policy on the secondary market? One scenario involves rising premiums that the policyholder can no longer afford. Alternatively, the owner may simply have no need for their policy and its coverage. Generally, as an agent, you advise clients to purchase insurance for a purpose, often with the intention of meeting the policyholder's particular goals. If the client originally bought a policy for a reason that no longer exists, obtaining the highest price for it on the secondary market makes good sense. Selling a policy will yield a significantly higher price for the client than simply settling for the cash surrender value.
Besides fulfilling an obligation to your client, how do these transactions pay off for you? Typically, you will receive a commission for the policy sale. Also, sellers will frequently re-invest the settlement's proceeds in other products, such as annuities, mutual funds, or more appropriate life insurance policies, which can yield additional commissions for you.
The sales process
Life insurance policies are usually sold through an informal process with no obligation on the part of the client to accept any of the offers. The ultimate purchaser of a policy is typically an institutional investor that packages policies as an investment vehicle with a projected return based on the life expectancy of the insured. However, financial firms rarely purchase policies directly.
Instead, they rely on life settlement firms, or providers, to advise them on policy evaluation and the maze of regulatory requirements governing policy purchase, and amass policies into portfolios with a significant investment value.
Packaging and shopping a policy
Selling a policy directly is not difficult for a life insurance agent, even if it's their first transaction, and following a number of important guidelines can help you make the most of your efforts.
First, you must appropriately package the policy. This means gathering not only a copy of the existing policy, but also the policy illustration as generated by the insurance carrier, a medical release form signed by the insured, up-to-date medical records, and life expectancy reports.
Next, you need to shop around for the best price by presenting your package to several reputable providers or, alternatively, life settlement brokers who can save you the legwork of shopping the policy to potential providers.
Selecting a life settlement partner
After identifying appropriate candidates through which to transact a life settlement, make sure that each firm meets several key criteria prior to soliciting a bid. First, verify that a firm represents institutional funders -- not single individual purchasers. Generally, institutional funders have strong legal compliance and document retention policies in place. By contrast, the door is open for individual purchasers to claim they were uninformed about the nature of the transaction and to request a reversal, even without real cause.
Check that your life settlement provider has up-to-date errors and omissions coverage, even if you have your own -- surprisingly, many providers do not.
A reputable firm will have written policies governing life settlement transactions and should share them with you. Look for a privacy policy that requires keeping the identity and medical history of the seller confidential except to potential purchasers and that bars the purchase of policies suspected of being issued or sold fraudulently. You may also ask for samples of their settlement agreements.
Make sure the firm you selected will use a third-party escrow agent during the transfer of the policy ownership. Remember, once your client signs over the ownership of their policy documentation, they will be wholly dependent upon the integrity of the purchaser for payment. Using an escrow agent to retain the sale proceeds during the transaction can protect the interests of both you and your client.
Many states require agents transacting a settlement to hold the proper licenses to do so. Therefore, you should ensure that the provider is properly licensed and has no regulatory or legal complaints filed against it.
When dealing directly with a life settlement firm, they will pay your commission, which is typically based upon a percentage of the policy purchase price. While most firms have a standard commission structure, negotiation is not uncommon. You should negotiate this early on.
Closing the deal
When establishing the structure of the bidding and sales processes, you can typically call the shots. Most often, a seller's representative will simultanously provide all candidates with a timetable for the submission of a written bid. When the offers come in, present them all to your client and select the best offer that meets their needs.
Congratulations -- you're now a player in the world of life settlements.
Zohar Elhanani is chief operating officer of the life settlement firm Legacy Benefits. For more information, call 800-875-100 or email info@legacybenefits.com.
