Life settlement companies facilitate the sale of life insurance policies for qualifying individuals 65 years or older. These companies serve as intermediaries between policyholders and potential buyers, helping policyholders unlock the value of their life insurance and improve their financial well-being.
In this piece, we’ll explore how life settlement companies work, examine what sellers can expect to receive from their settlement and offer tips on what to look for in a reputable life settlement company.
WHAT LIFE SETTLEMENT COMPANIES DO (CORE RESPONSIBILITIES)
Life settlement companies guide policyholders through the process of selling their life insurance policy.
Key components of this process include:
- Evaluating the policy eligibility and marketability
- Determining if the insured is a viable candidate
- Collecting and verifying policy and medical records
- Hiring an independent third-party actuary to determine longevity
- Internal pricing of the policy to determine actual value in the secondary market
- Presenting the policy to qualified buyers
- Negotiating offers on the policyholder’s behalf (if the company is acting as a broker)
- Coordinating compliance, paperwork and closing
LIFE SETTLEMENT BROKER VS. PROVIDER: THE TYPES OF LIFE SETTLEMENT COMPANIES
There are two primary types of life settlement companies: brokers and providers.
While both types connect sellers with prospective buyers, such as investors or fund managers, they have different priorities that can impact a policyholder’s potential payout.
Life settlement providers purchase policies on behalf of buyers. This means they act in the best interest of these buyers and look to purchase policies for the lowest price. A Provider’s business model is buy low and sell high, and the spread is their profit.
Life settlement brokers, meanwhile, work on behalf of policyholders. It’s their job to find, evaluate and present multiple market options and help clients get the best value for their policy. A life settlement broker is paid a percentage of the gross offer and is incentivized to drive up the price. A good broker will price the policy internally to determine the actual policy value, then share all pertinent information with the seller.
HOW LIFE SETTLEMENT BROKERS HELP POLICYHOLDERS
Working with a life settlement company — especially a broker — offers multiple benefits, including advocacy, coordination, simplification and communication.
Advocacy
Life settlement brokers advocate on behalf of their clients. With secondary market experience and expertise, advisors can negotiate competitive offers on behalf of the policyholder and ensure their best interests are protected.
Coordination
Life settlement companies also offer services that help coordinate the sales process. These include policy valuation, market analysis and administrative support throughout the life settlement process.
Simplification
Finally, life settlement brokers reduce the complexity of sales transactions. For example, they can help sellers complete necessary paperwork and ensure they have full knowledge of how much their policy is worth, what they’re getting from the sale, and how money is distributed.
Communication
Because the sale of a policy can take up to 90 days, a good broker will send out a weekly status report keeping the advisor and the insured up to date on the progress of their case.
HOW LIFE SETTLEMENT COMPANIES ARE COMPENSATED
How do life settlement brokers make money? They generate revenue through various means in the life settlement process.
The most common revenue streams for life settlement companies are commissions or fees, similar to how a real estate agent charges a commission for the sale of a house. This fee covers the company’s costs, including policy evaluation, marketing, negotiation, administrative support and other related services. The commission or fee is deducted from the final settlement amount before it is paid to the policyholder. (All fees are disclosed in the contract)
Compensation structure depends on the type of life settlement company. For example, life settlement providers charge a fee to buyers, while life settlement brokers take a commission or fee from sellers.
When it comes to life settlement company compensation, there is a simple rule to remember: Always look for disclosure and transparency. Companies should clearly communicate how their life settlement broker fees are structured, how this affects your payout and what factors may impact their commission.
HOW LIFE SETTLEMENT COMMISSIONS WORK
Commissions can range from 5% to 30% of your policy’s gross offer, but these numbers aren’t set in stone — they can often be discussed and negotiated. Exact commission rates will vary depending on several factors, such as the policy’s size and complexity, and the services provided by the broker or settlement company. Life settlement companies typically use one of three methods to calculate commission:
- Percentage of face value: In this approach, the fee or commission is calculated as a percentage of the policy’s face value, which is the total amount of the policy. For example, if you have a policy worth $500,000 (the face value), and commission is 5%, the fee is $25,000.
- Percentage of settlement amount: Alternatively, the fee or commission is sometimes based on a percentage of the final settlement amount. For instance, if the commission rate is 15%, and you receive a $400,000 settlement on a $1 million policy, the fee would be $60,000 (15% of $400,000).
- Percentage of value created: This approach calculates the value gained from a life settlement by measuring the difference between the amount received for a life insurance policy and its original value. If the amount received for a life insurance policy in a life settlement is $100,000, and the agreed-upon percentage is 10%, the fee would amount to $10,000.
Not all companies use all methods. Some offer policyholders a choice of options, while others use a single model for all transactions. While commission structures vary, state insurance regulations and disclosure requirements help ensure fairness across providers.
HOW DO YOU QUALIFY FOR A LIFE SETTLEMENT?
To qualify for a life settlement, you generally need to meet a few criteria, including:
- Be at least 65 years of age or older
- Have a life expectancy of less than 15 years
- Own a life insurance policy with at least a $100,000 face value
- Have a certain policy type, such as universal, whole life or a convertible term policy, joint survivorship policy
It’s worth noting that these are general guidelines. Final eligibility is determined by underwriting considerations, policy structures and market interest.
You can determine your eligibility by using Life Settlement Advisors’ life insurance policy calculator. Enter some information about yourself and your policy into the calculator, and we’ll determine your qualification status.
WHAT TO LOOK FOR IN A REPUTABLE LIFE SETTLEMENT COMPANY
Considering a life insurance settlement? Here’s what to look for in a reputablesettlement company:
- A willingness to educate the seller about the process
- Clear explanations of fees and roles
- Proper state licensing
- Willingness to answer questions in plain language
- No-pressure sales processes
- Transparent timelines and expectations
- Weekly communication on status of your policy sale
If you’re interested in selling your life insurance policy through a life settlement company, our team at Life Settlement Advisors has you covered. Get the details here, and when you’re ready to begin, complete our convenient online form to get started. You can also by phone, mail or social media.
