The decision to sell your life insurance policy in a process called a life settlement is often the product of careful consideration. But whether you no longer need your life insurance or can no longer afford the premiums, life settlements’ generous and flexible payouts can help you get the most out of your policy and reach financial goals like retirement or freedom from debt.
To get you started in the world of life settlements, this post provides a comprehensive guide to one of the common participants in this type of sale: life settlement brokers. From their role in life settlements to their relationship to policyowners, we’ll cover everything you need to know to make an informed decision about whether or not to pursue a brokered life settlement—so you can sell your life insurance policy with confidence.
What Are Life Settlement Brokers?
Life settlement brokers are licensed professionals who help negotiate life settlement contracts: agreements that allow people to sell their life insurance policies to a third party for cash. During this process, brokers approach licensed buyers on the policyowner’s behalf to market the policy and gather competitive bids.
Though a life settlement broker can help those who want minimum involvement in the life settlement process, their services come at the cost of extensive fees and commissions—often greater than 20% of your settlement. Because their commission is contingent on the face value of the settlement, brokers have a strong incentive to obtain the maximum life settlement payout for your policy. However, this commission will be deducted from your payout, resulting in a significantly lower cash sum from the sale than if the policy owner were to sell their policy directly to a buyer.
Why Sell a Life Insurance Policy?
The legal right of a policy owner to sell their policy has existed for over 100 years, and the life settlement industry has existed for over 30 years now. People see ads on TV and online every day, and there are about $4.5 billion of life settlements done every year. Wondering why you would want to consider selling a life insurance policy? There are a variety of reasons why people decide to take this step.
High monthly premiums: As you become older, the premium rate on life insurance policies often increases, often making continued payments unsustainable and counterproductive to your financial goals. Selling your life insurance policy in a life settlement allows policyowners to escape costly premiums without giving up the total death benefit. Unlike surrendering a life insurance policy or letting it lapse, life settlements provide a significantly higher payout than the cash surrender value, allowing policyowners to recoup a large part of their investment.
Alternative investments: Though they are often referenced as simply a way to set aside money for your beneficiaries, life insurance policies can also be thought of as investments. However, while this investment offers advantages such as acting as collateral in a policy loan, people sometimes decide to sell their policies in order to pivot to a different type of investment. With the motivation of diversifying their portfolios, policyowners might choose a life settlement as a way to maximize this investment before putting the cash payout into an alternative vehicle.
Emergencies or large purchases: If you need quick cash for an emergency expense or large purchase, selling your life insurance policy allows you to access a significant portion of your policy’s face value without having to trigger the death benefit. This is helpful for older policyowners who need money for retirement, escalating health care costs, or long-term care.
As these examples show, life settlements can be advantageous for people in a variety of situations. If you are 65 or older and have a life insurance policy of at least $100,000, a life settlement could help you meet your financial or retirement goals.
Who Does a Life Settlement Broker Represent?
When you initiate a brokered life settlement, the transaction will, broadly speaking, involve three parties: the person selling the policy, the company buying the policy, and the life settlement broker. The broker acts as the intermediary between the company buying the policy, called a life settlement provider, and you, the policyowner.
Though the broker will interact with both seller and buyer, they are legally bound to represent only the person selling the life insurance policy. Life insurance settlement brokers have a fiduciary duty to act in a policyowner’s best interest and help them find the maximum payout for their policy.
In return for their services, brokers receive a commission, calculated as a percentage of the entire sale’s payout. This commission can be as high as 30% of the sale amount and is deducted from the final sum the policyowner receives from the settlement. Depending on the size of your life insurance policy, this commission could amount to a significant sum and leave you with a much smaller payout than you would receive by transacting the settlement directly with a licensed life settlement provider.
Disadvantages of Using a Life Settlement Broker
Though the services of a life settlement broker can appear attractive to policyowners who want to avoid the legwork of selling a policy directly, it is worth noting that using a broker does come with several disadvantages. Below are a few of the drawbacks of pursuing a life settlement through a broker that you should consider before making any decision.
Life insurance settlement brokers deduct a large piece of a life settlement payout, as much as 30%, for their commission, which means the seller gets less for the policy than they deserve.
Selling your policy through a life settlement broker may subject sellers to the extra fees that some life settlement providers charge for brokered settlements. By selling directly to a licensed provider, sellers can avoid these fees and get the most from their policy.
Going through a broker adds additional time to the life settlement process, delaying the delivery of funds that policy sellers need from the sale.
As you weigh the costs of working with a broker against the benefits, it is a good time to consider what you are hoping to get out of the sale and how much time you are willing to sacrifice in the back-and-forth between the broker, seller, and buyer. If you would like to maximize the payout from your sale and access your cash as quickly as possible, selling your life insurance policy directly to a buyer may be a better option for you.
How Do Life Insurance Policy Settlements Work?
No matter your reason for pursuing a life settlement, the general process of working with a life insurance settlement broker will look the same.
After confirming your eligibility and your policy’s eligibility for the settlement, a life settlement broker will typically shop the policy around to several life settlement buyers. The broker will inform companies of the policy details in order to gauge their interest in the purchase. Companies who would like to purchase your policy will put forward bids for the settlement in which the policy goes to the highest bidder. The purchaser will then pay the policyowner for the sale, and the broker will deduct their commission from the policyowner’s payout.
Let’s take a closer look at a life insurance policy sale through a life settlement broker. The process can be divided into the following broad stages.
Before a life insurance settlement broker or company initiates a life settlement, they must first determine whether your policy is eligible for the sale and its current value. An eligible life settlement candidate must be at least 65 years old and have a policy worth $100,000 or more. Additionally, you will need to complete a detailed health questionnaire and authorize the life settlement broker or company to access your medical records and contact your insurance company.
Life settlement providers then review the policy in detail to see if they are interested in bidding on it. They will examine your life insurance policy contract and a premium illustration that you or your insurance company provides. These specifics allow providers to take into account the insured’s life expectancy and the expected death benefit when the insured dies.
Once providers have determined that your policy is eligible for a life settlement and decided that they would like to purchase it, your life settlement broker will then initiate an auction with several rounds of bidding to sell the policy to the highest bidder. When people note that brokered life settlements take longer than settlements in which you do the legwork yourself, it is this back-and-forth that adds time to the sale. By going directly to a life settlement provider, you can receive just as attractive an offer but without the time-consuming auction process.
After the sale has closed, the policyowner provides the policy buyer with the necessary transfer information and signs documents to formalize the change in ownership. This step finalizes the process of transferring the policy’s premium payments to the new policyowner. Closing the sale also includes paying the seller their settlement payout, a sum less than the policy’s full death benefit but greater than the cash surrender value. And, in brokered life settlements, it also means subtracting a life settlement broker’s fees and commission from the payout from the sale.
Lump Sum Cash Benefit
The most common life settlement option is an all-cash lump-sum payment where the purchaser takes over all future premium obligations.
Retained Death Benefit
A policy can be exchanged a reduced, in-force policy with guaranteed death benefits and no future premium obligations.
Long-Term Care Benefit.
Turn an existing policy into a Long-Term Care Benefit Account that can be used to cover any form of long-term care costs and final expenses with possible tax advantages.
Sell a policy to fund an annuity that will provide a guaranteed income stream for the rest of the annuitant’s life.
Choosing a Life Settlement Broker
Not all life settlement brokers have the same practices and commissions, so when choosing a broker, it is essential to understand up front the time and financial commitment that would come with the broker you are considering.
You will want to ensure full disclosure when it comes to the broker’s fees and commissions you will be responsible for once the sale is complete. This is the amount that a broker stands to receive from the settlement and sale; it can have a significant impact on the end payout that you receive. Because the broker’s commission is based on some fraction of the final sale value, the higher a percentage this commission is, the more will be taken from settlement payout and the less cash you will receive from the sale.
Another factor you should consider before entering into a brokered life settlement is the timeline of the sale. Pursuing a life settlement through a broker can extend the timeline of your sale because of back and forth between your broker and potential purchasers. As you contemplate what might be the best option for you, ask yourself when you need the cash from the sale. If you need the money from the sale of your policy to fund a large purchase or an emergency expense or is in any way time sensitive, the potential delay caused by a long, brokered life settlement may be a process you want to avoid.
The way you sell your life insurance will have important implications for your financial health, from how you plan for milestones like retirement to your preparedness for unexpected emergencies. While the above factors cannot not account for every possible consideration, they can help you determine whether working with a life insurance settlement broker or going directly to a life settlement provider is the right choice for you.
Whether you choose to pursue a life settlement through a broker or by directly approaching a life settlement provider will come down to the importance you place on the size of your payout and the timeline of the sale. Regardless of which path you choose, life settlements are a savvy way to exit your life insurance policy—giving you a financial boost that you can put towards your retirement savings or personal expense.
If you are interested in selling your policy or would like to learn more about how life settlements can help you Retire Like a Genius, contact the experts.