Just as life insurance policies brought to the secondary market may attract any number of varying offers, the agents who bring those policies to life settlement brokers can see varying levels of compensation for their work.
There is, in fact, no specific formula for determining compensation in a life settlement transaction. Rather the potential maximum compensation is largely determined by the funder, or buyer, in the deal.
“Generally, buyers will have rules about the maximum fees allowable,” said Martin Ruby, chief executive officer of Stonewood Financial in Lexington, Ky.
Stuart Meyerson, president of Autumn Life Settlements in Matthews, N.C., echoed that sentiment, referring to the funders as “driving” the compensation process.
“It’s clear that the funders have compensation structures,” he said, “and that they really control this whole thing.”
Meyerson said different funders will have different formulas for determining what their maximum compensation number is, and that those formulas can vary significantly between funders. “It’s all over the place” he said, noting that funders themselves may have different formulas for different types of policies or cases and those formulas may change often.
Ruby noted that there is “wide variation” among maximum compensation formulas, and Meyerson said he had heard of formulas that offer the lesser of 30% to 40% of the offer, or 6% of the face value of the policy. Additionally, he said that some funders will base their maximum compensation figure as a percentage of the gain for the insured, meaning the sale price in the life settlement transaction minus the surrender value of the policy.
There does appear to be a degree of settling on the issue, however. Ruby said it has become a “rough rule of thumb” for providers of setting potential fees at about 30% of the total settlement, the amount paid for the policy. Norm Caldwell, director of the Insuranceappraisal.com said that there is an “industry accepted guideline” of 6% of the face value of the policy, or 30% of the gross offer.