- Understanding the Life Settlement Process -
For that reason, it’s wise to get familiar with the settlement process early on. Life settlements aren’t terribly complicated, but — like buying a home — the steps can seem tedious when you don’t know what to expect. The good news is that the flow of a life settlement is structured to protect you and ensure that your transaction is compliant with state law.
Who's Involved in a Life Settlement?
A fair number of people come together to underwrite, market, and sell your life insurance. Typically, your life settlement company should do the legwork for you, but you may still interface with your advisors, underwriters, brokers, and escrow agents. Below is a review of who’s involved and what their roles are during your life settlement.
You, the policy owner
The entire life settlement process is driven by you. For most people, the first step is realizing that your life insurance is a financial asset that has resale value over and above its accumulated cash value. From there, you would reach out to a life settlement company, broker, or provider to find out roughly what your policy might be worth. Note that a life settlement provider is a buyer and going direct to the buyer often results in a lower offer. A life settlement company or broker markets your policy to multiple buyers to get the highest bid.
Your next major decision is whether or not to accept the highest offer you’ve received. You don’t have to accept any offers and you can even accept an offer and change your mind if your state has a mandated rescission period.
Your advisors
A life settlement is a financial transaction that usually proceeds under the guidance of your advisement team. That team might consist of a financial planner, your tax advisor, your insurance agent, and/or your lawyer. At a minimum, you should consult with a tax advisor, because life settlements do have tax consequences. If you are receiving any needs-based assistance such as Medicaid, you should also talk with an experienced elder law attorney who can analyze how the transaction will affect your eligibility for that assistance.
Life settlement companies
A life settlement company, like Harbor Life Settlements, oversees much of the life settlement process for you. At Harbor Life Settlements, we begin by reviewing your policy details and providing you with a free, no-obligation assessment of its value. If you decide to move forward, we’ll underwrite the policy and present it to brokers, who in turn market the policy to buyers. We act as your point of contact throughout, which streamlines your communications and gives you the opportunity to ask questions along the way.
Life expectancy underwriters
A life expectancy underwriter reviews your medical history, gender, age, and other factors to estimate your lifespan. The underwriting process involves comparing your data to averages for people with similar characteristics.
Your life expectancy is a key factor in the market value of your policy, so the underwriter plays a critical role. Buyers purchase life insurance as an investment, and their return on that investment is a function of the price they pay to buy and maintain the policy, the death benefit when you pass, and the time it takes to receive that death benefit. The life expectancy estimate gives buyers a sense of how much time may pass between when they purchase the policy and when they could reasonably expect to collect the payout.
Life settlement providers
Life settlement providers are companies and individuals who buy life insurance policies. These are the parties your broker invites to a competitive bidding auction. In most states, only companies and individuals who are licensed by the state department of insurance can participate as buyers in life settlements.
A life settlement provider can also buy life insurance directly from you, without a broker. This will spare you the broker’s commission, but usually results in a much lower sale price and lower net cash to you. The reason is simple: A broker drives up the price by initiating a competitive bidding auction. A life settlement provider that’s buying direct has no price competition and will often make a lowball offer as a result.
Investors
Investors fund the purchase of life insurance. If an individual investor is licensed, he or she would also be a life settlement provider. Otherwise, the provider works on behalf of the investor to bid on the policy, deploy funds if the offer is accepted, and secure ownership of the policy.
Escrow agents
The role of an escrow agent in a life settlement is very similar to that of an escrow agent in a home purchase. The agent is a neutral, third-party who gathers and validates necessary documents from the seller and buyer, holds the funds until the insurance company has recorded the change in ownership, and then disburses the funds to the broker and seller.
What is the Life Settlement Process?
Step One: Application
Your first step is to complete an application with a life settlement company like Harbor Life Settlements. You’ll provide details about you and your life insurance, including the type and size of the policy, the premiums, and the accumulated cash value.
Step Two: Documentation
Along with the application, you’ll provide a list of your healthcare providers who can supply medical records that will document your general health. You will also sign releases so those providers can legally transmit that information to your life settlement company.
Step Three: Review and Underwriting
Your life settlement company will review your application and documentation and request any clarifications needed before sending your information to the life expectancy underwriter. The underwriter then prepares a life expectancy report, which is included in the policy package that’s presented to prospective buyers.
Step Four: Bidding Auction
At Harbor Life Settlements, we will turn your policy over to our broker-partner Suncrest Benefits to set up and manage the bidding auction. Suncrest Benefits uses a one-of-a-kind, industry-leading online auction system that streamlines bidding for buyers. That process combined with a deep network of the industry’s top buyers enables Suncrest to regularly secure sale prices that are well above industry averages. Your policy might go through up to 10 rounds of bidding, generating 20 to 30 cash offers.
Step Five: Offer
When bidding closes, your life settlement company will review the activity with you and present the highest offer for your policy. You can then accept or decline that offer.
Step Six: Closing Package
After you accept an offer, the broker compiles a package of closing documents. Each regulating state defines the documents required to finalize the transaction, but the package commonly includes a contract, the life expectancy report, a letter of competency stating that you are capable of making rational decisions, and a verification from the insurer that the policy is active. You’ll also have to sign a change of ownership and change of beneficiary forms provided by your insurance carrier. All of the documents will be reviewed and validated by your escrow agent.
Step Seven: Notification
Once the documents are in place and the funds are in escrow, the change of ownership and change of beneficiary forms are sent to the insurance company. The insurer will notify you and the buyer when these changes have been implemented.
Step Eight: Funds transfer
After the escrow agent receives confirmation that the policy’s owner and beneficiary have been updated, the sale proceeds are disbursed. You will receive the offer, less broker commissions and any escrow fees. Your broker and fees are paid directly from escrow.
Step Nine: Rescission period
Most states do require a rescission period, which is a duration of time during which you can change your mind. The time frame varies by state, but it’s often one or two weeks. Should you decide to keep your life insurance, you can use your right to rescind and roll back the entire transaction. You’d return the funds and would be reinstated as policy owner. Once the rescission period expires, your life settlement is final.
