All About Life Settlement Brokers
Simply put, life settlement and viatical settlement brokers work on your behalf to get you the maximum possible price when you’re selling a life insurance policy you no longer need or want.
What is a life settlement broker?
A life settlement broker is a licensed professional who markets and negotiates life settlement contracts. A life settlement or viatical settlement contract is the sale of a life insurance policy to a third party. Selling is a lucrative alternative to letting the coverage lapse or surrendering it back to the insurance provider. When you surrender a permanent life policy, your insurer pays out the policy’s cash value to you, less any surrender fees. But licensed life insurance providers are often willing to pay more than the cash value to assume ownership of that policy and its death benefit.
There are several reasons why you might be ready to part with your life insurance coverage. You might not want the ongoing burden of premium payments, or you might prefer to have the cash on hand in lieu of that death benefit. You might also be implementing a Medicaid spend-down, or raising funds to pay for long-term care.
Whatever the circumstances, most policyowners are motivated to get the maximum cash possible for that insurance asset. And selling the policy through a life settlement broker generally delivers that outcome.
Who does a life settlement broker represent?
A life settlement and viatical settlement broker doesn’t buy your policy; he or she presents your policy to several qualified buyers on your behalf. Life settlement contracts are generally regulated by state law, which means brokers must be licensed. They also have fiduciary responsibility to represent you in good faith throughout the brokerage process.
Direct buyer vs. life settlement broker
As you can guess, life settlement brokers don’t work for free. They do earn a commission on the sale of your policy, which you might view as an expense. However, the broker’s commission doesn’t really come out of your pocket — it is deducted from the sale proceeds. Plus, the broker does absorb the costs of life and viatical settlement valuation and underwriting, which could save you thousands. And, you’re under no obligation during the brokerage process, so if you don’t sell, you don’t pay. If you choose to sell directly to a buyer, you wouldn’t pay a commission, but you will likely end up with lower cash proceeds. No doubt.
You’ve likely worked with direct buyers in other types of transactions. Say you’re selling a used car. Your direct buyers show up, kick the tires, and then tell you they only have $1,500 cash on hand — even though your asking price is $2,500. These buyers are motivated to buy the asset for the lowest price possible. That’s at odds with your goal, which is to sell the asset for the highest price possible.
This dynamic holds in life settlement contracts, too. In this case, your direct buyers are licensed, life settlement providers that purchase life insurance policies as investments. They might buy the policy for their own portfolio, or they can purchase it on behalf of institutional investors.
The return providers earn on these investments is based on the price they pay, the time it takes for you to pass, and size of the resulting death benefit. While the death benefit is a known amount, there is some uncertainty surrounding your lifespan. These investors are therefore motivated to keep the buy-price low, which improves their chances of a higher return later.
For that reason, life settlement providers may give you a low-ball offer when you approach them directly to purchase your policy. But things play out differently when you hire a life settlement broker. Brokers create a competitive bidding environment by presenting your policy to multiple buyers in an auction format, and then managing through several rounds of bidding. The bidding buyers know they have competition for that asset, and that they can’t get away with a low-ball offer. That naturally creates a much higher sell price, which could more than offset the broker’s commission.
How do life settlement brokers get compensated?
And about those commissions…life settlement brokers follow a pay-for-performance model. If you don’t get a price you want or otherwise decide not to sell the policy, you shouldn’t owe the broker anything. The commission paid to the broker comes out of the proceeds from the sale transaction, not out of your pocket.
You can learn more about the different types of fee structures for life settlement brokers below, under What to look for in a life settlement broker.
Life Settlement Brokerage Process
It’s accurate to say that life settlement brokers facilitate life insurance settlements, but that’s also an oversimplification of the broker’s role. The life settlement and viatical settlement brokerage process is fairly complicated, and it’s the broker who manages the details and keeps the process moving forward. Generally, there are five phases to a successful life insurance settlement: prequalification, documentation gathering, policy submission, auction, and sale closure.
1. Pre-qualify the applicant for life settlement viability
In the prequalification phase, your life settlement broker will collect some basic information from you to determine if your policy is sellable. Your age is a significant data point; you need to be at least 65 to be eligible for a life settlement contract. Your broker will also ask you to provide a general description of your health and, possibly, to complete a medical questionnaire. And finally, you’ll share details of the policy itself, including the type of life insurance, the face amount, cash surrender value, annual premiums, and whether you have policy loans outstanding.
Several types of cash-value life insurance policies are eligible for a life settlement contract, including variable life and universal life. You could even sell a term policy that can be converted into permanent life insurance. Group and individual policies qualify, as well as some second-to-die policies. A second-to-die policy has two insureds, and the death benefit isn’t paid out until both pass away.
2. Gather the necessary submission requirements
After your broker determines that the policy qualifies for a life settlement contact, he or she will assemble a document package. This is a critical step in securing the best price for that policy. The documentation should include your basic information plus information about your insurance coverage, including evidence that you are the legal policy owner. But the details prospective buyers are most interested in have to do with your medical history. These include your health statement, completed medical questionnaire, health records from your physician, and any lifespan reports produced by a medical underwriter. To make a solid offer on your policy, life settlement providers need a complete view of your medical history.
Sharing your medical records can be a sensitive topic, but it is a non-negotiable part of the brokerage process. You would need to sign a HIPAA release that authorizes your broker to gather your medical files from your physician and then share them with prospective buyers. Once you sign that release, the transfer of information should proceed without your involvement. You will not need to submit to a medical exam.
3. Submit to licensed providers
With a full documentation package on hand, your life settlement broker can start marketing your policy. This is the start of the competitive bid process — several licensed life settlement providers will review the documentation and independently quantify what the policy is worth. And then, they submit their offers.
As you might guess, the quality and size of the life settlement broker’s network are important here. You’ll get higher offers if your broker can pitch your policy to several premier-level buyers.
4. Manage auction process
Prospective buyers will identify the maximum they’re willing to pay for the policy, but they often won’t lead with that max bid. The auction process goes through rounds, with the bids getting incrementally higher in each round. Through this process, your broker is documenting the bids and keeping the bidders apprised of how competitive their offers are — essentially, to encourage those incremental increases. The most attractive policies might go through 10 bidding rounds and generate 20 or 30 offers.
Most brokers manage these bidding rounds manually. Harbor Life Settlements’ sister company, Harbor Life Brokerage, is owned by the same team and operated under the same CEO, Lucas Siegel. With a custom-build, proprietary auction site, we’re able to take a more automated approach. As the world’s most advanced life settlement auction site, it caters to the market’s largest buyers to drive up the price of the policy, so you get the highest payout.
When bidding closes, your life settlement broker selects the winning bid and reports back to you.
5. Close the sale
Once you accept the winning bid, your broker assembles a closing package. The exact documentation needed is usually defined by state law and can include the following:
- Letter of competency: A letter of competency is a doctor’s certification that you are able to make independent, rational decisions about your own healthcare and finances. This ensures the buyer that you are not being coerced into the transaction and are moving forward on your own accord.
- Verification of coverage: The life insurance carrier must verify that the coverage is active.
- Signed offer sheet: The offer sheet details the life settlement provider’s bid.
- Life settlement contract: This is the purchase agreement that outlines the terms of the transaction.
- Life expectancy reports: Life expectancy reports are written by medical underwriters based on your medical history. They may also be called mortality and longevity reports.
- Change of ownership form: Your insurance carrier will require a completed change of ownership form or change of policyholder form to update the policy.
- Change of beneficiary form: The buyer of your policy will specify a new beneficiary. The insurance carrier requires the change of beneficiary form to update the policy.
These closing documents are delivered to the insurance company and the purchase funds are put into escrow. Once the insurance company verifies that the policy ownership and beneficiary have been updated, the funds, less any fees and commissions, are released to you.
Post-close, you usually have a short rescission period, during which you can cancel the transaction if you change your mind. The exact time frame is defined by state law, but is usually about two weeks. Once that rescission period ends, the transaction is final.
How to find a life settlement broker
Unfortunately, not all life settlement brokers are equipped to maximize the selling price of your life insurance. The best are those who have an extensive network of high-quality buyers, plus the experience to manage the details of these complex transactions.
If you’re in the market for a life settlement broker, you could start your search by checking with family, friends, and neighbors for referrals. If you are working with other advisors, such as financial planners, tax accountants, estate planners, or elder law attorneys, they may also have recommendations for you. You can also work through Harbor Life Settlements, based in Austin, Texas. At Harbor Life, we use our sister company, Harbor Life Brokerage, exclusively to broker life settlements and viatical settlements. That allows us to work hand-in-hand with your case manager to get you a top offer.
What to look for in a life settlement broker
You’ll want to question any prospective life settlement brokers on their licensing, fee structure, transparency and communication practices, and — of course — their buyer network.
Licensing. Before you begin interviewing life settlement brokers, research the licensing requirements in your state. Then, right off the bat, you can verify that your prospective brokers have the appropriate licensing.
Fees. There are three commonly used formulas to determine the fee you pay for a life settlement broker’s services: percentage of face value, percentage of the offer, and percentage of value created. Let’s look at how these fee structures compare, assuming the policy being sold has a $200,000 face value and cash surrender value of $18,000.
- Percentage of face value calculates the fee based on the insurance policy’s face value. The face value is the policy’s original death benefit, not including any loans outstanding. If a life settlement broker earns a commission of 6% against a face value of $200,000, the fee is $12,000.
- Percentage of offer calculates the commission against the agreed-upon sale price of the policy. The offer will be much smaller than the policy’s face value, so this formula uses a higher percentage. You might pay a 30% commission against the sale price, for example. Assuming your $200,000 policy gets an offer of $50,000, that equates to a broker fee of $15,000.
- Percentage of value created uses the difference between the offer and the policy’s surrender value to calculate the fee. In our example, the value created is a $50,000 offer, less the cash surrender value or $21,000 — which is $29,000. At 30%, the fee works out to $8,700.
You’ll commonly see a broker structure fees as the lesser of 6% of the policy’s face value or 30% of the offer.
Transparency. You should trust that your broker will keep you informed of your rights at every step of the process. Technically, a broker could fulfill state-imposed transparency requirements by handing you a bunch of disclosure forms to sign. But you’ll be better able to make the right decisions if that broker also takes the time to explain what the various contracts, agreements, and disclosures mean.
Buyer network. The quality of the broker’s buyer network directly influences the number and size of the offers you’ll receive on your policy. Ask the broker about prior transactions: Were the policies comparable to yours in face value? How many deals has that broker closed? What was the average sale price relative to the policy’s face value? You should also ask how many life settlement buyers will have the opportunity to bid on your policy, and how many bids you can expect.
Use a Life Settlement Company to Simplify the Process
Life settlement brokers market life insurance policies. Life settlement providers purchase life insurance policies. There’s actually one more player in these transactions to define, and that’s the life settlement company. A life settlement company like Harbor Life Settlements connects you, the policyholder, with life settlement brokers and collects the bids from those brokers. That simplifies the process for you, from start to finish.
The life settlement company’s role
Your life settlement company will be your main point of contact throughout the process. You’ll provide your insurance details and healthcare information, and the life settlement company will first prequalify and then underwrite your policy. The underwritten policy is then presented to brokers on your behalf. That frees your broker to focus on the auction and bid management part of the process. And it frees you from getting buried in the details of your transaction. Offers generated during competitive bidding are sent by the broker back to your life settlement company, which then presents those bids to you.
Harbor Life Settlements and Harbor Life Brokerage
As a life settlement company, Harbor Life Settlements works exclusively with Harbor Life Brokerage, our sister broker partner. Harbor Life Brokerage has a unique advantage over other life settlement brokers: The company uses an online auction system to streamline policy submissions and bidding. The system offers efficiencies for providers by automating certain processes, such as the ability to get life expectancy reports, medical records, along with verification of coverage forms and illustrations from carriers. Those features are attracting the industry’s top buyers to Harbor Life Brokerage auctions.
While life settlement providers appreciate the automation built into the Harbor Life Brokerage online exchange, policyowners appreciate Harbor Life Brokerage’s history of delivering high sale prices. According to The Life Settlements Report, amounts paid for life settlement contracts range on average from 13.5% to 22.82% of the policy’s face value. Deals closed to date through the Harbor Life Brokerage exchange are averaging 30% of face value. That difference translates to substantially more dollars in your pocket.
Life settlement brokers fetch top dollar
Life settlement brokers are licensed professionals, who work to get you top dollar for that life insurance policy that you no longer need or want. Working through a broker, rather than selling directly, can generate more cash from that life insurance asset, because the broker creates a competitive bidding environment. But, not all brokers offer the same level of service. Take time to understand their fees, their process, and — importantly — their history of generating high-value offers for policyowners like you.
As you can see, a life settlement and the brokerage process can be quite complex. Harbor Life makes it easier by handling many of the most time-consuming details for you. Fill out the form below to get your life settlement started with a free estimate.