LIFE SETTLEMENT TRANSACTIONS BENEFIT BOTH CLIENT AND AGENT: SETTLING THE QUESTIONS SURROUNDING THIS INCREASINGLY IMPORTANT FINANCIAL TOOL
By Zohar Elhanani, Legacy Benefits Corporation, New York, N.Y.
It’s becoming increasingly mainstream. The policies purchased are even being packaged into one of Wall Street’s new investment products. And it can benefit both you and your clients. But for most life insurance agents, the questions surrounding life settlements are anything but settled.
For starters, what are the reasons someone would sell a life insurance policy in the secondary market? One obvious answer is that the policy holder can no longer afford the premiums and needs money for other purposes. Another more typical reason is that the policy holder simply no longer needs the insurance coverage. Typically, insurance is purchased for a purpose — to provide funds for surviving family members or other interested parties (such as business partners) in case of the policy holder’s untimely death. These purchases are often done in the context of comprehensive estate and financial planning efforts. But circumstances usually change, and if a policy is no longer needed, selling it for an immediate lump sum payment makes a lot of sense as an alternative to surrendering the policy to the insurance company for a much lower surrender value payment.
With the growing visibility of life settlements—which are now yielding billions of dollars in death benefits to institutional investors annually— your clients may likely soon express a desire to sell a policy. Or, if selling makes sense, you may find yourself suggesting this alternative to a client as part of your business relationship, in the interest of providing good ongoing service.
The good news is that a life settlement transaction can benefit both you and your client. Clearly, maximizing the proceeds obtained from the sale of a policy does a client holder an important service as compared with a cash surrender. In addition, an agent who assists in the settlement transaction typically receives a commission from it. What’s more, sellers often choose to re-invest proceeds in new life insurance coverage or in annuities or mutual funds — all of which can yield additional compensation for agents.
Assuming you, as an insurance agent, have a client with a policy to sell, where do you start? In many instances, the agent can maximize proceeds and commissions by working directly with a life settlement firm or “provider,” such as Legacy Benefits Corporation. These firms purchase life insurance policies for financial institutions and other organizations that typically package them into investment vehicles with a projected return based on the life expectancies of those insured. Today, policies are rarely purchased by individuals or held as a stand-alone asset for investment purposes.
Members of a life settlement firm like Legacy Benefits are experts in evaluating policies, navigating the maze of regulatory requirements that apply to settlements, and amassing policies into a portfolio that has significant investment value. The ultimate purchasers of policies rely on the expertise of these firms for successful transactions in this highly specialized field.
A recognized leader in the life settlement industry, Legacy Benefits was one of the pioneers of the field. Since 1991, the company has specialized in the origination, servicing, and management of life insurance assets for a broad range of clients.It uses an ever-evolving array of sophisticated analytical tools and upholds the highest ethical standards when evaluating and acquiring unwanted or unneeded insurance policies for its institutional clientele. Legacy Benefits was founded by company president Meir Eliav, a 30-year financial services veteran, who was a founding member and past-president of the Life Insurance Settlement Association (LISA), the largest U.S. trade association in the industry.
Legacy Benefits and many other life settlement providers are pleased to work directly with agents who want to sell policies in the secondary market. Selling a policy directly is not difficult, but following a number of tried-and-true guidelines will help make the most of your efforts.
As an alternative, you might refer the policy to a life settlement broker, who can save you time and effort, but of course will affect compensation from the transaction with an additional commission.
Should you decide to go it alone, you must first compile information on the insured to include in your policy package. In addition to a copy of the insurance policy, you will need the policy illustration as generated by the insurance carrier, and a medical release form signed by the insured. You will also need updated medical records, which can be obtained from the insured’s physician, and life expectancy reports, which are an analysis of the client’s medical history and actuarial life expectancy determination as prepared by one of a handful of specialized firms. This documentation will enable the life settlement provider firms to present you with a bid for the policy.
Next, shop around for the best price. The only way you will know what a policy is truly worth is to present your package to several reputable life settlement providers. The universe of established firms is small, and you can easily tackle this yourself. You may be surprised at the range of purchase price offers you receive; your client will depend on you to obtain the highest offer.
You also may be surprised at how much the business practices of settlement firms vary. Whether dealing directly with a provider or through a broker, it is crucial to make sure that the provider that ultimately purchases your client’s policy meets key criteria.
First, verify with the firm that it represents institutional funders — not a single individual who wishes to purchase the policy. This information quite often is posted on the firm’s Web site. Institutional funders clearly understand what they are buying. They have a strong legal compliance practice and comprehensive legal documentation in place.
In contrast, the door can sometimes be open for individual purchasers to claim they were uninformed about the nature of the transaction and ask for it to be reversed. Even without real cause, the matter may be tied up in court for some time. Moreover, most policy sellers would be uncomfortable knowing that an unknown individual will benefit directly from their death. Institutions, by contrast, amass pools of policies and have no specific interest in the individuals involved.
Make sure that your life settlement provider has errors and omissions coverage in place, even if you have your own. Again, coverage for all parties involved in a transaction is a sound business practice. Legacy Benefits maintains such a policy, but perhaps surprisingly, many providers do not. Also, check your own policy, because it may not specifically cover life settlements.
Does the provider use a third party escrow agent during policy ownership transfer? This is imperative, although unfortunately, many life settlement firms do not follow this practice. Once your client signs over ownership of a policy, that’s it. He or she no longer has any rights in the policy and depends on the integrity of the purchaser to make payment. Use of an escrow agent is simply a sound business practice, just as it is in a real estate transaction.
A growing number of states require licensing to engage in a life settlement transaction. Make sure the provider holds a license in the applicable state (generally, the state of the seller’s primary residence). Of course, you should also check to make sure the provider has no relevant lawsuits or major complaints lodged against it. Common sense also suggests that you obtain references from other agents who have used that firm’s services.
Next, take some time to explore the culture of the firm as expressed in its internal policies and procedures. A reputable firm will have written documents and should be happy to share them with you. In particular, the firm should have a clearly articulated privacy policy that mandates keeping the identity and medical history of an individual confidential except to potential purchasers. It also should have a policy that bars the purchase of policies suspected of being issued or sold fraudulently, as well as other dishonest business practices. Ask for samples of their settlement agreements.
Before you provide any firm with your client’s life insurance package, inquire about the company’s policy purchasing parameters. Some firms are interested only in policies that fall within internal guidelines for a policy holder’s age and health. This will enable you to shop the policy to firms that are legitimate candidates for purchase and minimize your client’s exposure to those that are not.
If you deal directly with a life settlement firm, it will be paying your commission. This is typically based on a percentage of the policy purchase price. Most firms have a standard commission structure, but negotiation is not uncommon. Naturally, this should be agreed to as part of the life settlement negotiation.
In most cases, the agent can establish the structure of the bidding and sales process. The agent will distribute policy information packages simultaneously to all life settlement providers under consideration, with a timetable for submitting a bid. Bids are generally provided in writing, either by e-mail or mail. One word of caution: the life settlement industry is relatively small, and sometimes a provider will see the same policy from multiple sources — agents, brokers, even policy holders themselves. Naturally, the provider will not know whose offering to take seriously, which may result in confusion and lower offers than would be received if the policy were represented by a single, authoritative professional. Clients do themselves a disservice with multiple representatives, who may contact the same group of providers.
Once the package has gone out, wait until your offers come in, submit all the bids to your client, and enjoy your success. The process doesn’t have to be complicated. It can be simple if handled with professional skill and knowledge. And the result, in the end, is optimal service to the client, and enhanced compensation and professional satisfaction to the agent.
SIDEBAR
The Value of a Life Settlement Broker: Case Histories
A life settlement broker can save a life insurance agent considerable time and effort in a life settlement transaction (particularly for an agent who doesn’t “know the ropes”) and ensure best execution and value for the client.
“Always ask for references, and choose your broker as carefully as a life settlement provider,” says Stephen Shorrock, co-managing director of Select Life Settlement Corporation of Northport, NY. Shorrock is also past president and CEO of Bankers Life Insurance Company of New York, and a recognized expert in the field. He shares several examples of life settlements in which his firm, in the role of broker, created a successful match between a policy seller and a life settlement provider, such as Legacy Benefits.
- Beatrice, a 71-year-old female, owned a $1 million universal life policy and was paying $72,000 in annual premiums. The cash value of the policy was $51,000. Beatrice could no longer afford the premiums and wanted to sell the policy on the secondary market. Realizing a significant profit, she wound up settling for $155,000.
- Jim, an 83-year-old retired businessman, held a universal life policy with a face amount of $540,000. The policy had almost no cash value and the premium was no longer affordable for him. Purchased to provide key person coverage, the policy had outlived its usefulness when Jim retired. Through a life settlement, he received $101,000 for the policy. He used this income to help fund his wife’s experimental treatment for an illness not covered by their medical insurance.
- Bill, age 89, was in the process of relocating to a nursing home. He was insured under an $800,000 universal life policy issued in 2000. The policy had a cash value of $78,000. Current annual premiums were already $50,000 and were scheduled to double within 10 years. One of his key intentions for the policy was to offset estate taxes. Because of his personal finances and tax law changes, however, this was now unnecessary. The policy received $390,000 on the secondary market — five times the cash value. Bill was ecstatic to realize this from a policy that had outlived its usefulness.
Zohar Elhanani is chief operating officer of Legacy Benefits Corporation. He has a diverse business background that includes sales and management responsibilities for two digital imaging technology companies, Scitex Corporation and IDX Systems Corporation. He also managed investments in the information technology, enterprise software, and communications sectors for Giza Venture Capital Fund. Mr. Elhanani earned dual degrees in law and economics from Tel Aviv University in Israel, and a masters in business administration from Solvay Business School in Brussels, Belgium.
