November 15, 2018
Explaining a Life Settlement Broker and Provider
Life settlements are highly regulated transactions, governed by each individual state’s insurance laws. Currently, 43 states regulate life settlement transactions. In these regulations, the parties to a transaction are outlined, as well as such parties’ role and responsibilities in a transaction.
Two of the key parties in a life settlement transaction are the life settlement provider (also sometimes referred to as a viatical settlement provider) and the life settlement broker (also sometimes referred to as a viatical settlement broker). The life settlement broker and life settlement provider each fulfill a separate role in a secondary market life settlement transaction.
What is a Life Settlement?
A life settlement (also sometimes referred to as a viatical settlement) is the sale of a life insurance policy to an unrelated third-party for an amount greater than the cash surrender value but less than the policy face value (death benefit). A life settlement company buys the life insurance policy after completing an underwriting of the policy – reviewing the insured’s medical records to assess a life expectancy and an analysis of the life insurance policy.
Is a life insurance settlement right for you? For more information on the life settlement process, refer to this blog article.
What is a Life Settlement Broker?
The life settlement broker represents the policy owner/seller of a life policy (also sometimes referred to as the viator), with the objective of maximizing the payout that the policy owner/seller will receive in a life settlement. Typically, the life settlement broker is paid a commission or brokerage fee from the sales proceeds. A life settlement broker has a fiduciary duty to the policy owner.
The brokerage fee or commission is typically based on the face value (death benefit) of the life insurance policy. A life/viatical settlement broker is not required to be involved in a life settlement transaction.
What is a Life Settlement Provider?
The life settlement provider (or viatical settlement provider) is the company that is licensed to facilitate the sale of the policy, working with the life settlement investor to complete the policy purchase in compliance with all applicable rules and regulations. The licensed life settlement provider is the only party in the transaction that is authorized to work directly with the seller and also represent the buyer to complete a policy sale.
Life settlement providers are paid a closing fee by the institutional investor that purchases the policy, and the seller has no responsibility for paying any brokerage fees or commissions to the life settlement provider. By law, a life/viatical settlement provider is required to be a party in a life settlement transaction in all regulated states when the purchaser of your life insurance policy is an institutional investor.
Both life settlement providers (also sometimes known as viatical settlement providers) and life settlement brokers (also sometimes known as viatical settlement brokers) have specific licensing requirements state-by-state. The licensure is based on that particular state’s regulations.
By law, to become a licensed life settlement provider, the life settlement company must file a license application with the department of insurance in the state (whether that company is a resident or non-resident company). An application fee is required, as well as a filing of a form of life settlement contract (sometimes known as a viatical settlement contract) and disclaimer (also referred to as disclosure) form that will be used to complete the policy sale.
The requirements to obtain a settlement broker license vary state by state. In some states, a producer license for life and health insurance is adequate for insurance agents and life insurance producers. In other states, there are separate, specific requirements to be a life or viatical settlement broker. Many financial advisors, financial planners, and insurance agents are also licensed as life settlement brokers. For an example of the settlement broker license requirements, please refer to the requirements for New York State.
Licensed companies also need to provide an in-state address to act as a service of process mailing address should the need to contact the company arise. A license renewal is required annually (submission of renewal fee and renewal application) for both resident and non-resident licensees. Some states issue an updated settlement provider license each year, while others only issue the license at the time of original approval.
How Do I Know If I Am Working with a Properly Licensed Company?
The best way to check if the life settlement broker or life settlement provider you are working with has proper licensure is to check your state’s department of insurance website. A simple Google search will take you to the right website (should have a “.gov” at the end of the address).
To see if life settlements or viatical settlements are regulated in your state, you can refer to this map of state regulation.
What Can a Policyholder Expect in a Life Settlement Transaction?
All types of life insurance policies qualify for a life settlement – whole life, term life, universal life, variable life, indexed life, as well as group policies. When a policyholder sells a life insurance policy in a life settlement transaction, the sale is completed by entering a life settlement contract with the buyer of the policy. You should also check on the following items:
- The life settlement contract and all supporting sales documents are approved by the state during the licensure process.
- The life settlement company purchasing your policy should be an institutional investor. Just ask your life settlement provider to confirm this fact.
- The sales proceeds should be placed into an escrow account prior to the final closing of your life insurance policy.
- The final step is submitting change of ownership and beneficiary forms to the insurance company to complete the policy sale. Confirm that your funds are in an escrow account prior to delivering these forms to the life settlement provider.
How is a Life Insurance Policy Valued?
The value of a life insurance policy is based upon an underwriting of the policyholder’s medical records (to calculate a life expectancy) and an analysis of the life insurance policy (face value, projected future premiums, cash surrender value, etc.). More details on life settlement valuation can be found in another of our blog articles. In addition, if you are interested in getting an instant, no obligation estimate of your life insurance policy, try our life settlement calculator.
For more information, see our page on the role of the life settlement provider in a life settlement. Also, you can refer to our FAQ about life settlements and viatical settlement transactions. You can email us at email@example.com, book an appointment with one of our experts, or call us at (866) 679-9410.
Author: Steven Shapiro
Steven Shapiro is the founder of the Company and also the President and CEO of Q Capital Strategies, LLC and Life Settlement Solutions LLC. Steven has been active in the life settlement industry for the last 18 years. In addition to his life settlement experience, Steven has expertise in strategic consulting, investment banking advisory services, and private equity investing. Steven holds a B.A. degree in economics from the University of Pennsylvania and an M.B.A. in finance and entrepreneurial management from The Wharton School of the University of Pennsylvania. Steven is also the immediate past Chair of LISA (having previously served as Chair), the Life Insurance Settlement Association, the oldest and largest trade organization in the life settlement industry.