What You Need to Know
- The transactions can produce revenue for either agents or advisors.
- Both advisors and agents can collect referral fees.
- Licensed agents may be able to get more than 40% of the broker’s commission.
Although life settlements are increasingly popular as a liquidity solution for cash-strapped seniors, they’re still a subject of confusion for many financial professionals.
To clear up the big question straight away, life settlements are completely legal. They’re regulated in most U.S. states to protect policyholders, investors, life settlement brokers, and insurers from fraud.
As well, it’s also legal for financial advisors and licensed life insurance agents to receive compensation for facilitating a life settlement. Depending on the situation, that compensation can come in the form of referral fees, override fees, commissions, or earnings on the client’s reinvestment of the proceeds.
Here’s a deeper look at those earnings opportunities and how they apply to financial advisors and licensed life insurance agents.
Referral, Override and Reinvestment Fees
Financial advisors operating in a fiduciary capacity normally would not receive a commission for facilitating a life settlement transaction — but they can earn referral fees, override fees, and reinvestment fees.
Referral fees and override fees are based on the face value of the policy that’s sold. Typically, the advisor and life settlement broker would negotiate the fee percentage based on the details of the situation, but it might be in the range of 0.10% to 0.25% of the policy’s face value. An advisor might refer a client who has a $500,000 life insurance policy to a life settlement broker, for example. A negotiated referral fee of 0.25% equates to $1,250 in earnings once the transaction closes — regardless of the policy’s selling price.
The advisor or agent with access to a large network of other advisors or agents could also negotiate override fees, to earn on every life settlement that’s initiated through his or her network.
As an example, say Advisor A refers Advisor B to a life settlement broker. Advisor B has a client with an unwanted life insurance policy and introduces that client to the life settlement broker as well. If the client proceeds with the sale and the transaction closes, Advisor A earns the override fee and Advisor B would earn the referral fee.
Advisor B will also benefit from an increase in asset management fees if the policyholder decides to direct the life settlement proceeds into an investment account under management. That’s not a self-serving recommendation on the advisor’s part, either. It’s often the right move to make when the policyholder’s primary financial concern is long-term solvency in retirement.