Life settlement companies facilitate the sale of life insurance policies for qualifying individuals 65 years or older who may no longer need their policies or can’t afford them. These companies serve as intermediaries between policyholders and potential buyers, creating opportunities for individuals to unlock their life insurance policy’s value and improve their financial well-being.
Working with a life settlement company can be quite beneficial for a policyholder. Life settlement companies have expertise in the secondary market and can negotiate competitive offers on behalf of the policyholder, ensuring they receive the maximum value for their policy. Plus, life settlement companies offer various services to policyholders, including policy valuation, market analysis, and administrative support throughout the life settlement process.
If you’re trying to decide “Is life settlement a good investment?” but not sure how it all works, keep reading. We’ll explore how exactly a life settlement company operates and how to qualify for a life settlement.
How Do Settlement Companies Make Money?
Life settlement companies generate revenue through various means in the life settlement process. While the specifics may vary, here are a couple of common ways that these companies generate revenue:
- Commission or Fee – Settlement companies often charge a commission or fee for their services, 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.
- Other Revenue Streams – Some settlement companies may diversify their revenue streams by offering additional services or products related to life settlements. These can include estate planning, financial planning, or other investment opportunities that complement the life settlement process. These additional services may have separate fees or generate revenue through partnerships and referrals.
What Is the Commission of a Life Settlement?
Typically, commissions can range from 5% to 30% of your policy’s face value, but remember, these numbers aren’t set in stone and can be discussed and negotiated. Exact commission rates will vary depending on several factors, such as the policy’s size, complexity, and the services provided by the broker or settlement company. To calculate these fees, life settlement companies follow two determinations:
- Percentage of Face Value – In this approach, the fee or commission is calculated as a percentage of the policy’s face value. For example, if the agreed-upon commission rate is 5% and the policy’s face value is $500,000, the fee would amount to $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 20% and the settlement amount is $400,000, the fee would be $80,000.
- 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.
When exploring life settlements, it’s important to shop around, ask for commission rates, and choose a trustworthy company that provides this information in advance. In the past, some unethical brokers took advantage of people by charging exorbitant commissions, sometimes as high as 50% of the settlement amount, without properly disclosing this to the consumers.
Thankfully, regulatory bodies have implemented rules aimed at controlling excessive commission rates and promoting upfront disclosure of rates by companies. To illustrate, the Financial Industry Regulatory Authority (FINRA) released Rule 2121 to address fair prices and commissions in securities transactions. The fairness of a commission is evaluated based on multiple factors as per the rule, taking into account market conditions during the transaction, the costs involved in executing the order, and the value of services rendered by the company based on its expertise and understanding.
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 under 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 (term life insurance policies do not qualify if they are not convertible)
You can find out 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.
Are you interested in selling your life insurance policy through a life settlement company? Our team at Life Settlement Advisors has you covered! Discover all the details about our straightforward process right here. When you’re ready to begin, complete our convenient online form to get started, or contact us by phone, mail, or social media.