It’s a fact. The life settlement industry is in growth mode. As a result, insurance professionals nationwide are seeing a flurry of marketing campaigns offering to facilitate the purchase of their clients’ life insurance policies.
This is a good thing. Increased messaging about the benefits of a life settlement can only help to establish greater consumer awareness for a product that, for some, may be the most sensible option for unwanted policies. Unfortunately, many Americans who own policies that are on the verge of lapse or surrender are leaving billions of dollars on the table, as noted in Warren Hersch’s recent article, “Forfeited life insurance benefits pegged at $112 billion.”
Agents familiar with the life settlement marketplace recognize that the life settlement broker has traditionally played a key role over the years in creating the secondary market arbitrage (bidding war) that ultimately establishes each policy’s “fair market value.”
But, to those agents who believe they are being targeted with marketing messages directly from providers/funders, it may appear as though the provider/funder is leapfrogging the familiar agent-broker-provider/funder model.
Many agents, especially those who are new to handling life settlement transactions for their clients, may not fully understand the role of each player and the dynamics of the marketplace. Some agents who are being approached by both brokers and providers/funders may become overwhelmed or confused as it relates to the correct approach.
Their primary goal is to help their clients make the right decision while feeling confident that the offer they have received represents the policy’s fair market value. However, that is difficult to accomplish by working directly with only one or two providers/funders.
Determining fair market value
Life settlement brokers have been keystone players in the marketplace due to their role in sourcing and supplying large volumes of policies that match the pricing guidelines and portfolio objectives of the providers’ investors. Settlement brokers who employ compliance and underwriting staff also help identify any red flags over licensure issues before the cases proceed through the review process and reach the provider’s desk.
Over the past 20 years, market forces in the life settlement industry have caused the industry to grow, contract, and now grow again. The industry’s volatility during the recent economic downturn caused some participants to close up shop, and for some providers/funders to morph into a hybrid business model that both sources and services product flow.
Today, we operate in a marketplace where clear boundaries over roles have changed. From the agent’s vantage point, marketing campaigns indicate the function of the life settlement broker has blurred relative to role of the provider/funder in delivering the highest possible offer for their clients’ policies.
Regardless of shifting market dynamics and the blurring of roles, certain truths remain:
- Policy sellers are entitled to receive the fair market value for their life insurance asset.
- Determining the fair market value of the policy typically occurs as a result of an auction process where the life settlement broker creates a bidding war among multiple providers/funders who compete to purchase the policy.
Secondary market bidding wars
As the secondary market auction begins, the life settlement broker represents the policy seller in pursuit of the highest possible offer. The provider represents the interests of investors to purchase policies at the greatest possible discount.
Let’s assume the settlement broker presents a life settlement case to 10 providers licensed to do business in the state where the policy owner resides. Let’s further assume that each of these 10 providers has five institutional money sources with different investment parameters.