Life Insurance Settlements: Who Does What?

Providers (aka Buyers)

Providers are buyers, and they advertise a lot because they want clients and advisors to contact them directly.

The reason? No competition.

They say they will give you a good offer for your client's policy. You keep out the third-party brokers, and you get to keep 100% of the commission.

Some will say that they have many funds behind them, which means you will receive a good offer.

To be fair, what they say is not untrue, and it is good marketing.

However, they are not revealing the entire picture, and there are downsides to going direct to a provider.

1. Providers do not have a fiduciary duty to clients to offer the highest amount for a client's policy.

If they have no competition, there is no incentive for them to maximize value for clients.

2. Many buyers do have multiple funds behind them.

But, you don't know how they operate with those funds.

Are they sending your client's policy to one fund only?

To only a few who pay them the most money?

Even if they send the policy to all of their funds, do they just watch to see who has the highest offer?

If so, this sounds good, right?

The policy has seemingly been "marketed", but in reality, it hasn't.

The process with buyers is opaque in that you don't know how or with whom the policy has been presented.

3. Keeping 100% of commission for yourself sounds good as well, but 100% of what?

If the buyer does not make an offer, 100% of zero is zero.

Or, if the buyer makes a low offer, 100% of all of the commission may turn out to be less.

Brokers

Life settlement brokers are on the side of advisors and their clients.

A broker's fiduciary duty is to market a client's policy to obtain the highest amount of money for a policy that they can.

This is much different than a provider that has multiple funds behind them.

How? Brokers have access to many different providers, with many funds behind them, giving a client's policy much more visibility to the market and higher offers.

The more providers that see a policy, the better.

This allows brokers to leverage providers against each other, obtaining the highest value for a client's policy.

This is not just sending a policy into the market and seeing which fund has the highest offer.

It is the leverage that is the broker's superpower.

Many times, providers offer multiple times on the same policy and drive up the offers on a policy because they have competition from other providers.

There are no "comps" as in real estate, so unless a policy is fully marketed with many providers, there is no way to know the true value of a client's policy.

In addition, a broker's work is transparent. A client's policy sale contract will outline exactly what offers were obtained from which providers and the highest offer that was accepted.

There is a downside to going through a broker: A broker is paid a commission for the broker's work.

That commission is typically shared with advisors, so advisors do not receive 100% of the total commission.

However, offers with brokers are typically higher, and advisors often receive more commission, even with the commission share.

For instance, a $350,000 policy that was recently marketed started with an opening offer of $10,000, with the final offer being accepted by the client of $72,000.

The commission on a $10,000 offer, even if going direct and keeping 100% of the commission, is less than the commission on $72,000 and sharing with a broker.

Another recent example is a $200,000 policy that started at $20,000, and the final offer that was accepted was $55,000. Or, a $1 million policy that started at $300,000 and sold for $450,000.

In addition, commissions are negotiable, to make sense for the client and advisor. They are fully disclosed in the sale contract with a sign-off by the client.

Marketing Firms/Lead Generators

There are also marketing firms or lead generators that are advertising.

They are neither buyers nor brokers, and they may not be licensed.

Marketing firms are simply trying to get clients/advisors to give their contact information so they can sell the lead.

It is hard sometimes to tell if an email or website is a marketing firm or not.

Both providers and brokers must have appropriate licensing or state approval from insurance departments in each state to transact business in the state, and they generally will use the word "provider" or "broker" on their website.

Marketing firms usually have fine print on the bottom of their website that says that they are neither a provider nor a broker and will send the information to a licensed entity.

How do you know with what type of life settlement company you are working?

It may not always be obvious on an email or website (personally, I think it should be listed, so it is easy to see) what type of company you are speaking with, so ask what they are: provider, broker, or marketing firm.

Once you know, you will be aware of exactly what the positives and negatives are for you and your client in working with that company.

I am not saying one way is "bad" and the other is "good".

Providers are important.

Without them, we have no market, so I fully appreciate who they are and what they do.

But, to be transparent, I am a broker, and I see the value that brokers provide to advisors and their clients every day, besting the offers from providers often, should a client or advisor choose to go direct to a provider first.

The reality is that life settlements are often a better option for a client than lapsing or surrendering a policy, and we are grateful for the opportunity to be of service.

Lisa Rehburg is president of Rehburg Life Insurance Settlements, a life insurance settlements broker. She can be reached at 714-349-7981.

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