In a life settlement transaction there are two sides that come to the table: the seller and the buyer. Typically, each party is represented by a life settlement professional. Providers represent investors who want to buy policies and brokers represent policy owners who want to sell their policies.
It is not uncommon to hear providers suggest that clients and life insurance producers do business directly with them without the help of a life settlement broker. But taking this advice from a provider is much like asking a fox how to protect the hen house.
Providers represent investors and are duty bound only to them. A provider gets paid by acquiring policies for investors and their job is to acquire them at the lowest possible cost. The fewer competitors they have for a policy, the better chance they will have to acquire that policy at a bargain price. In addition, their compensation may be enhanced by acquiring policies cheaply.
None of this makes them bad people; it just means that you and your client’s best interests are not aligned with theirs.
Life settlement laws provide that an insurance producer who assists a client in selling a policy in a life settlement takes on the role of a broker. Unlike the initial sale of life insurance, in the life settlement world a producer/broker owes a fiduciary duty to the client.
Part of that duty includes best efforts to maximize the sales price of the client’s policy. Because a life settlement transaction is not an everyday event for most producers, life settlement brokerages are frequently used by producers to assist them in the sale of their clients’ policies.
Producers and clients who go direct, without using a life settlement brokerage, will often miss out on a large portion of the life settlement marketplace. Many providers will not deal directly with producers (or clients for that matter). Additionally, producers will likely be unaware of some providers. Good life settlement brokerages know where the money is! When a producer goes to only a handful of providers, is it any wonder that the reduced competition does not bring the highest bids?
Here’s an example of an transaction where a producer tried to go direct to a provider, because he believed he had an easy, straight forward case. On his own, he was able to negotiate a $400,000 offer for his client’s $3 million policy.
Suspecting this offer was too low, but unable to do better, he ultimately came to us to shop the policy. We were able to bring the offer up to a $1.4 million! Most alarming was that the high bidder wound up being the same one that had previously offered only $400,000 with the comment, “No way can we can do better — grab this while you can.”
The take-away: There is no sticker price for an insurance policy on the life settlement market. The potential buyers evaluate each policy individually, primarily based on the insured’s health and on the cost to carry the policy. The sales price is ultimately determined by an informal auction; the more bidders, the better chance you have to bring up the price for your client’s policy.
As you can see, it is in the provider’s interest to have you transact your life settlement business directly with them without the use of broker. Unfortunately, that could easily be to your client’s detriment and ultimately yours as well.
Failing to adequately shop a policy would likely violate your fiduciary duty to your client. Using a skilled, reliable settlement brokerage can assure you that the most has been done to get you and your client top dollar for their policy.