Who's Who In Life Settlement

Quick -- what's the difference between a life settlement funder, broker, and provider? As life settlement transactions become increasingly mainstream, agents are much more likely to become involved, even if only peripherally. With a little expertise, you can become a more valuable resource to your clients, and perhaps earn lucrative commissions in the process.

Life settlement, of course, is the sale of an existing life insurance policy to a third party, typically an institutional funder. A settlement provides the policyholder with immediate cash, while purchasers cover the policy's future premiums and then receive the payout when the insured individual dies. For clients who no longer need or want a policy, life settlement is a far more lucrative choice than surrendering it for its cash value -- and is unquestionably better than simply letting a policy lapse.

Benefits for Policyholders and Agents

But why would a life insurance sales professional want to become involved in a client's decision to disengage from a policy that the agent worked hard to put in place? To begin with, it may be implied in the law. Life settlement often is in the best interest of a client as the most lucrative exit strategy for those who no longer want or are financially unable to maintain coverage. Because an agent has at least an implied fiduciary responsibility to represent a client's best interest and to provide full disclosure, you really are obligated to discuss a life settlement with clients considering policy termination.

Additionally, by helping your clients who may benefit from a settlement, typically you will earn a commission of 3% to 4% of the policy sales price -- more than most other professionals involved in the transaction will earn. A client may wish to re-invest the funds realized through the policy sale, perhaps providing the agent with the opportunity for earning additional commissions.

Specifically, how is a life insurance agent involved in a life settlement transaction? You may simply recommend a settlement when appropriate, use the services of an experienced life settlement broker to manage the sale, and then receive your commission.

For agents who do not intend to make life settlement a focus of their practice, sending the project to a broker may be the best choice. However, for an agent, life settlement can be a lucrative niche or even an entirely new career. Savvy agents can play the same role as a broker and earn additional commissions of up to 2% in the transaction. Brokering transactions also provides an excellent path into the field. But be aware that the process requires expertise as well as some financial investment that may not be recouped if the transaction is never completed.

However they choose to participate in a life settlement, agents can deal with a wide range of specialized professionals, and understanding the role of each will provide an excellent overview of the transaction process itself.

The Life Settlement Transaction Team: The Sell Side

The Broker or Agent/Broker. As sales agents for policyholders, life settlement brokers -- or you as an agent/broker -- are responsible for skillfully packaging a policy for evaluation by potential purchasers or, most often, for a purchaser's agent, the provider. Brokers shop a policy around, obtain multiple bids -- which may vary substantially -- and present them to the seller. With their finger on the pulse of the marketplace, typically brokers have some general sense of a policy's underlying value, are often familiar with the major players in the field, and know how to approach them.

To market a policy, brokers are responsible for assembling a wide range of specialized documentation. This includes a copy of the policy and the policy illustration, which is a snapshot of the benefits, premiums, and cash values, and how these will change over the insured's lifetime. Also required is the insured's HIPAA release for the disclosure of medical information, medical records, and specially prepared life expectancy reports. The expenses in brokering a policy are incurred in large part to obtain this documentation and typically are not reimbursed.
Without the resources to assemble this information themselves, most potential purchasers will only consider policies that are accompanied by the complete documentation necessary for policy valuation.

With a growing number of states now regulating life settlements, many require licensing of life settlement brokers in the policyowner's state of residence. In many of those states, however, any life insurance agent with a valid life insurance license may legally broker a policy. It bears repeating that representing a client's best interest in a life settlement, as in the initial policy sales process, remains the agent's fiduciary responsibility.

Financial Advisors. Often accountants, attorneys, estate planners, or other financial advisors are involved in a life settlement to assist the seller with accounting, tax, estate planning, and other legal issues. Typically, they play a role up front in the decision to sell, and again after the fact in managing the financial transactions. Often, an agent or agent/broker will have some contact with these individuals. Occasionally, financial advisors may also act as a broker and place a policy up for bid.

Other Life Insurance Agents. Other agents may be involved in your client's life settlement transaction simply because any commission distribution structure that applies to a life insurance policy sale may also apply to a life settlement. Agents acting as brokers would be well served to explore this in advance with their general agents and other distribution partners, including carriers.

The Life Settlement Transaction Team: The Buy Side

Funders. "Funder" is the term generally applied to the ultimate policy purchaser -- the investor that will hold a policy or group of policies until payout. Typical funders include investment banks, hedge funds, investment companies and funds, and similar institutional entities, as well as groups of private investors. These entities may use their own capital to acquire policies or may raise funds through a range of financial structures.

In addition, after purchasing policies, funders may repackage and resell the resulting financial instruments to investors in the capital markets.

Providers. Just as sellers typically do not represent themselves in life settlement transactions, neither do the ultimate policy purchasers (with rare exceptions) -- again because of the highly specialized knowledge required to value a policy as well as to identify specific policies that will meet the purchaser's investment goals. Policy purchases usually are negotiated through a purchaser's agent, known as a life settlement provider.

My firm, Berlin Atlantic Capital US (BAC US) based in Atlanta, is an institutional investor with its own provider operation that brings years of experience, expertise, and knowledge to this specialized pursuit. Agreed upon in advance of the sale and paid by funders, provider fees are usually deducted from the funder's bid and therefore from the gross offer presented to the policy seller.

Using the insured's life expectancy reports, as well as premium payment schedules and related documents, the provider works with the purchaser to determine the policy value and the bid amount.

It is often the provider's responsibility to screen policies and identify those that meet a funder's pre-determined criteria. For example, a funder may wish to assemble a block of policies likely to generate a predictable cash distribution at regular intervals during a 10-year period. A provider has the expertise to evaluate the policies currently on the market, to make a judgment about when the policies will likely deliver payment, and to structure a portfolio that achieves the purchaser's objectives.

Providers generally make the actual policy bid on behalf of their clients and they may briefly take title of the policy before transferring it to the new owner, while funders make the actual cash payments. Today, many states require providers to hold a license when working with insured individuals and policyowners residing within their boundaries.

Providers are the professionals who the broker or agent/broker deals with most frequently. After brokering a number of settlements, some life insurance agents have used that experience to move into the life settlement field and pursue successful careers as providers.

Hybrids. Increasingly, the distinctions among various entities on the buy side are becoming blurred. For example, as larger and more diversified firms like BAC US grow their specialized life settlement provider businesses, they may evolve not only to represent external funders, but also function as funders themselves to reap greater benefits from the asset class. Experts believe this is an extremely positive development. With a deeper investment in the field, firms like BAC US, for example, continually refine their purchasing practices and financial models to achieve greater sophistication in life settlement.

Backed by significant staff, experience and funds, BAC US is able to participate in the market on many levels and to enhance benefits offered to policy sellers and an ever-widening group of investors. For example, it has the funds to purchase attractive policies whenever available and to warehouse them to build well-balanced policy blocks for future sale. With appropriate financial experts on staff, it can create sophisticated life insurance-backed investment vehicles, including securitized offerings, for sale in the capital markets. It can also bring together a group of individual investors and structure a fund fine-tuned to their needs.

Because of the greater policy volume handled, hybrid organizations may provide a broker or agent/broker with greater opportunities to sell policies with more accurate pricing. BAC US life settlement experts also are able to directly evaluate some policies presented by agents without the assistance of broker intermediaries.

Other Vendors

Underwriters/Life Expectancy Providers. Life expectancy and related reports required for policy valuation are typically prepared by one of several underwriting firms recognized for their life settlement expertise. Sometimes these reports may be procured from other sources, however.

After an examination of medical records and other information, life expectancy providers determine a mortality rating and prepare a life expectancy (LE) estimate expressed in months. An individual's LE is generally agreed to be the point on the mortality curve when 50% of the population of the same age with a similar medical history will have passed on. This data is analyzed and applied to an offer for each eligible policy.

The broker or broker/agent is responsible for working with an appropriate firm to secure this documentation.

Medical Records Procurer. Assembling medical records from various physician's offices can be a significant task. If the broker or broker/agent does not have the resources for this, various medical records firms can provide assistance. Their fees are typically $300 to $500 or more to obtain comprehensive records for one individual.

Escrow Agent. In many areas of business, using the services of an escrow agent is a sound practice -- and so too for life settlement. A provider should engage an escrow agent to hold the purchaser's funds before any policyholder signs over policy ownership to an investor or other entity involved in the deal. Most regulated states require the use of an escrow agent in life settlement transactions, to protect the various parties involved.

Life insurance agents who have participated in a life settlement often find it an interesting and rewarding experience. Now that you understand all the players, perhaps it's time you considered how you might fit into the game.

Christopher Conway is executive vice president with Berlin Atlantic Capital US and has overseen BAC's life settlement subsidiary, BAC Structured Life Group, LLC, since May 2007. Mr. Conway, who began his insurance career in 1984, has sold life insurance, annuities, investments, and financial planning services and has managed both a life agency and a financial planning practice. He has spoken about life settlements to industry and investor groups in Europe, Asia, and the U.S.