When life insurance policy owners first learn about the option to sell their policy to a third party as an immediate source of cash, they often wonder what kind of companies, or investors, would want to buy the policy.
Hedge funds, banks, insurance companies, and even pension funds are active investors in the life settlement arena. Life settlements represent a solid addition to a diverse portfolio for investors in today's marketplace.
Life settlement regulations
Providers must acquire and maintain the proper provider licenses for their state. About 90% of the U.S. population is protected by life settlement regulations and laws in 42 states and the territory of Puerto Rico.
Transparency is the cornerstone of life settlement regulation. Many states with life settlement laws require providers to give policy owners full disclosure that includes broker compensation information.
Most states also require that consumers receive the following information before and during the life settlement process:
- Escrow agreements
- Offers and counteroffers, risks related to taxation and government assistance
- Alternatives to settlements
The Life Insurance Consumer Disclosure Model Act, adopted in 2010 by the National Conference of Insurance Legislators (NCOIL), requires the insurance issuer to notify the policy holder about life settlements as an alternative to lapse or surrender of their life insurance policy.
Six states have adopted this consumer-focused regulation. Oregon, Maine, Kentucky, New Hampshire, Washington, and Wisconsin all have laws that require insurance companies to actively inform their policy holders about the life settlement option.
Life settlement brokers help facilitate the transaction
People who choose to explore the option of selling their life insurance policy often do so with the help of a broker. They facilitate the transaction and help the seller get the most value for their life insurance policy by communicating with potential buyers.
Because the companies who buy life insurance policies are usually small brokerages, it's a good idea to use a life settlement broker to help navigate through the process. Doing so helps the policy owner get more money in exchange for their life insurance policy. A broker can also explain each step of the process and answer questions.
Using a broker to facilitate a life settlement transaction isn't required, however. The policy owner can choose to approach life settlement buyers themselves and avoid paying broker's commissions.
It's important for the policy owner to be aware that the broker should be working on their behalf to get the best possible offer for the policy. Here are some things to look for when choosing a broker:
A broker's job is to solicit the highest possible offers from several companies for the policy owner's benefit. This may take time. A broker looking for a fast commission may encourage the policy owner to take the first offer, as opposed to waiting for other companies to respond to their query.
It's important for the policy owner to understand their state's regulations regarding waiting periods and broker commissions. Throughout the process, a reputable broker will offer complete transparency where the details of the life settlement deal are concerned.
The policy owner should understand the structure and amount of the broker's potential commissions. Reputable brokers are happy to share this information during the decision-making process.
Before the life settlement industry was regulated, brokerages were sometimes guilty of charging large commissions as high as 50% of the settlement amount. Now, all fees and commissions have a cap determined by each state's individual rules and regulations.
Certain companies charge a flat percentage. In most states, the maximum is 30% of the settlement value. In some situations, the policy holder may pay a contingency commission determined by the life settlement offer's size.
A life settlement broker should only share private information about the insured person with parties who require the information to produce an offer. This may include life expectancy underwriters and life settlement providers.
The broker should be fully licensed in the appropriate state. Each state has their own licensing requirements. Understanding the licensing requirements of the insured's state helps mitigate any concerns about the safety and oversight of a life settlement.
Life settlement providers purchase policies
Investors use life settlement providers for origination. Providers are licensed in their state to purchase life insurance policies on behalf of these investors.
Providers specialize in deciding how much a policy may be worth in a life settlement. They understand how to collect information about the current interest rates, the insured's life expectancy, and the characteristics of the life insurance policy and use that information to make a bid for the policy.
If the provider is a FINRA registered and licensed investor, they may sell fractional interests in the insurance policy to various investors. The provider may resell the policy to an individual investor, as well.
Life insurance policies purchased as an investment are usually bundled together with many other policies of the same type to help the investor manage the risk of any single policy. In some cases, investors buy fractions of those packages to reduce the risk even further.
Bundling many life insurance policies together as a single investment also helps the insured and their family understand that no single person is going to benefit directly from their death.
The life settlement industry has undergone many changes in the past decade that make the process of selling a life insurance policy for cash much safer than it was in the past. State regulations, industry oversight, and transparency throughout the process make selling a life insurance policy a financial decision that carries very little risk for the insured.