How To Evaluate The Best Life Settlement Companies
Life settlements can provide much-needed cash for seniors and others who hold life insurance policies. Because the life settlement industry is fairly new, though, it can be overwhelming to navigate the process, benefits, and the life settlement companies involved. Policyholders can protect themselves and receive the most out of their life insurance policies by learning more about these companies and how to choose one.
About Life Settlements
A life settlement, also called a senior settlement, occurs when a policyholder sells a life insurance policy. A life settlement can be a good alternative for individuals or trusts who can no longer pay the policy premiums or who need extra cash. Businesses might opt for a life settlement on a company owned life insurance policy (sometimes referred to as a “key man” policy) for key employees who no longer work for the company. Non-profits and charitable organizations sometimes receive donations of life insurance policies with which they can sell into the life settlement market to turn the donation into cash that can be used to further their mission.
Regardless of the reasons for selling, when a life insurance policy is no longer wanted or needed, policyholders have several options. Among these are:
- letting the policy lapse,
- obtaining an accelerated death benefit for the terminally ill,
- surrendering the policy back to the insurance company for its cash surrender value,
- taking out a loan against the insurance policy, or
- selling the policy for less than the net death benefit but more than the cash surrender value through a life settlement.
Policyholders work through a life settlement business to sell their life insurance policies. A life settlement is typically a regulated transaction that complies with state insurance regulations and is facilitated by companies that are licensed in the state of the transaction.
The Life Settlement Company Role
Life settlement firms purchase or arrange the purchase of life insurance policies that individuals, businesses, nonprofits, or trusts no longer want or need. Two types of firms can be party to the sale of a life insurance policy. Policyholders can either reach out to a life settlement provider or a life settlement broker (both life settlement providers and brokers are licensed entities or individuals). Some life settlement firms both broker and purchase life insurance policies, although this can present a conflict of interest. Many financial advisors and insurance agents, called producers, also act as brokers. Q Life Settlements works with licensed life settlement providers and brokers to facilitate policy sales.
Providers are firms that purchase life insurance policies. Life settlement providers either purchase a policy directly from a policyholder or work with a policyholder’s life settlement broker to purchase a policy. Life settlement providers purchase policies on behalf of large institutional investors who own diversified portfolios. Those investors typically hold the policy to maturity, paying the premiums while the policy is still in-force and collecting on the policy at the time of maturity. Life settlement providers are regulated by state regulatory authorities (typically, the state Insurance Department or Financial Services Department).
When a policyholder sells their life insurance policy through a life settlement broker, the broker connects the policyholder with potential buyers for a fee. When working with life settlement brokers, the policy owner does not deal directly with the policy purchasers. Life insurance agents and financial advisors who are licensed as life settlement brokers often reach out to larger brokerage firms to obtain competitive bids for their clients’ life insurance policies. Life settlement brokers (either as a company or individually) and life settlement providers are regulated by state regulatory authorities (typically, the state Insurance Department or Financial Services Department).
Steps In Choosing The Best Company
Many seniors feel they have more control over the life settlement transaction by investigating the life settlement process and various companies on their own. Others feel more comfortable letting a life settlement broker navigate the process for them. Both options have their advantages.
Life settlement firms, whether brokers or providers, will offer policyholders guidance through the sales process. Most guidance can be found through their websites. Related internet sites can offer guidance, as well. The website of the Life Insurance Settlement Association (LISA), for example, includes a thorough list of questions to ask before partnering with any given firm.
Factors To Consider
Before a policyholder chooses a life settlement company partner, s/he should be aware of a few key points relevant to dealing with either a life settlement provider or life settlement broker. Sellers should only work with experienced and properly licensed life settlement business who can provide evidence of years of positive past performance. It is also important to understand your selected partner’s licensing, bonding, and insurance. Additional items to consider are: how long is the process going to take, what are (if any) the tax implications of selling the policy, who is the purchaser of the policy, how will my confidential information be handle during and after the sales process.
Licensing, Bonding, and Insurance
Sellers should only work with licensed life settlement firms. State licensing ensures that sellers are adequately protected in both the sales process and after the sale is completed. You can have confidence in a regulated life settlement company, since its principals, internal policies and procedures have been vetted by a regulatory authority. In addition, the regulators have reviewed and approved all of the closing documents that need to be signed at the time of a policy sale.
Licensing does not necessarily imply legitimacy or competence, though. Some states have stricter requirements and more closely vet companies prior to approving and granting a license to a life settlement company. As an example, for life settlement providers, Florida has the most thorough licensing process, as well as, a continuing compliance requirements. As a result, the number of life settlement providers licensed in Florida is more limited than other states, and these companies can be viewed as having completed a thorough review that provides a high level of credibility.
Firms should also be bonded. A surety bond protects the policyholder should the life settlement company not uphold its legal obligations.
Some states require bonding, and some do not. Of those that do, some waive the bond requirement if the life settlement company has significant Errors and Omissions (E&O) insurance coverage and/or has made a sizable cash deposit with the State Treasurer. Credible firms will be bonded, though, whether required or not.
Additionally, companies should carry E&O insurance. A life settlement company that does not qualify for E&O coverage could have a poor track record.
Timing and Taxes
The timing of a sale can be crucial to a seller. Sellers must realize that the life settlement process occurs over several weeks or, more often, several months. This is important to understand for those who are short on cash or who may be terminally ill.
Terminally ill consumers have another option – a viatical settlement. A seller who has a life expectancy of two years or less can automatically qualify for a viatical settlement, tax-free, per the 1996 Health Insurance Portability and Accountability Act (HIPAA). Viatical settlements were the precursors to life-settlements for terminally ill patients and are much like life settlements.
A seller with a longer life expectancy may or may not qualify to sell their policy. Qualification depends primarily on the type of insurance policy and the cost of the premium. Different life settlement investors can have different objectives and time frames for their investors that dictate how long they are willing to wait for a return on investment.
Sellers who do qualify should be aware that a life settlement can trigger a tax obligation. Policyholders should speak with a trusted tax advisor before selling their policies. Firms in this industry cannot advise sellers on policyholders’ specific tax liabilities.
Company Confidentiality Rules
Following a life settlement, sellers will need to update their firm regularly on the status of their health. Your company should provide written confidentiality agreements and have systems in place to safeguard policyholders’ sensitive information. Regulations do limit the frequency that companies can contact policy sellers.
Life settlement investors purchase life insurance policies as an alternative to typical stock, bond, and real estate investments. A policyholder should ask his/her life settlement company about the funding source/investor and prefer a large, institutional investment company (as is typical). Technically, anyone with enough capital can purchase a policyholder’s life insurance, but this would be ill-advised as that individual would have a vested interest in the seller’s death.
Large, institutional investment companies provide more privacy to the seller. The seller’s policy is part of a bundle of other policies and investments. Rarely will any one individual policy stand out more than the many others.
Working Directly With A Provider
Selling a life insurance policy is about as complex and time-consuming as selling a home. If a policyholder is still making their own financial decisions and has ever sold a home on their own, the likelihood is good that they can learn to sell their policy on their own without a broker.
Working directly with a life settlement provider has two primary advantages. The first is that the transaction usually occurs more quickly than when a life settlement broker is used. By eliminating several intermediaries and steps, the entire process is smoother and faster. The second advantage is that these organizations do not charge commissions (as life settlement brokers do), so the seller receives more proceeds.
Working With A Broker
Like a real estate agent, life settlement brokers represent sellers. Some sellers are not confident that they can realize the maximum value of their policy on their own, or they simply do not have the time, energy, or interest to learn the life settlement process. Sellers who wish to work with these brokers should bear in mind that:
- Life settlement brokers should disclose all fees in the transaction before they occur, keeping sellers informed of all expenses to be incurred along the way.
- Life settlement brokers are paid either a percentage of the face value of a life insurance policy or a percentage of the sales proceeds brokered. Those who are paid on a percentage of the policy’s face value may have no financial incentive to obtain the highest offer. Those who are paid a percentage of the sale do have this financial incentive, but the percentage, most often around 30%, can be high enough to offset value received through higher bids.
Life settlement companies are not all created equal. Whether a seller chooses to work directly with a life settlement provider or with a life settlement broker, they should do their research and carefully consider all options. For more information on life settlements, please contact us, we’d love to discuss your unique situation.