Life insurance policyholders who qualify for a life settlement or viatical settlement have a difficult choice to make.
One choice leads to a ‘direct buyer’(DB) who would be purchasing the policy for their own portfolio. DBs are known for making remarkably low offers to purchase a policy. However, this path allows the policyholder to sell the policy quickly, avoiding the longer process of taking the policy to a marketplace where buyers can bid and compete for the policy. This longer path of taking a policy to market, though it almost always results in significantly higher offers, is a longer and often-terrible process.
Hiring a broker to represent the policyholder’s financial interests is crucial and, in some states, even required by law.
Life Settlements Defined
A life settlement generally refers to the sale of a life insurance policy to a third party. The buyer pays the policyholder a single cash payment to become beneficiary of the policy and assumes the responsibility of paying all future premiums. The policyholder gets access to much needed or wanted capital and the buyer becomes the new owner and beneficiary.
Policyholders are increasingly seeking life settlements instead of letting policies lapse or surrendering them back to the insurance company. The profit from the sale of the policy is generally greater than the surrender value. The policyholder benefits from having paid the premiums to the insurer for many years, and now has a lump sum of money to pay for medical treatment, long-term care, or, in some cases, to simply enjoy retirement more fully.
Step One: Decide Whether To Sell the Policy, Or Not.
Life insurance policyholders interested in a quote for a policy are encouraged to use a life settlement calculator. If the calculator results suggest a policy is qualified, policyholders should next reach out to a broker.
Consultations with a life settlement broker are always free. During these consults, a life settlement broker will help determine the best path forward, even if that path does not financially benefit the brokers or does not include a life settlement at all.
A qualified broker will ask a variety questions to help determine the likelihood a policy will sell and for what price.
- How much are the current premiums? Are the premiums increasing?
- Are there alternatives to consider, like an “accelerated death benefit” rider that could potentially be of more value than a settlement?
- How significant if at all are the life settlement tax obligations?
These are important questions and others must be answered before the policyholder decides to pursue a life settlement, or not.
Step Two: Hire A Broker, Let The Brokers Do Broker Things
The life settlement process involves a lot of work. Hiring a broker is always in the policyholder’s financial interest. In some states, even required by law.
First, the brokers invest actual capital into each life settlement client that they represent. Acquiring medical records, illustrations, getting official documents prepared with signatures all have actual costs covered by the broker. This amount varies from $2,500-$4,000 per case. Aside from the time spent on the case, brokers are financially invested in each case represented.
Additionally, brokers do all the terrible work. The qualification and underwriting process involves extensive communication with doctor’s offices, life insurance companies, providers, and all other parties involved. This part of the process can be arduous to complete and involves repeated calls and emails to keep things moving.
It’s important for policyholders to remember that life insurance companies are losing money on the deal. So, insurance companies delaying the process at every turn is common and to be expected. A financially invested broker will assure this terrible process keeps moving along.
Step Three: With Official Documents Secured, Enter The Marketplace
One a life settlement broker has secured all the required paperwork, a policy is then sent to a buy-ready network of life settlement investors that actively bid on the policy, in most cases, driving up the price significantly. This process of being “Out To Market” requires 2-4 weeks to complete.
Many individual investors purchase policies, and there are also investment funds, that will buy policies. A broker will contact potential purchasers on behalf of the policyholder.
Step Four: Highest Offer Accepted, Close the Deal.
Once the highest offer possible is attained, it’s the policyholder who must ultimately makes the final decision to sell or hold the policy.
If the offer is accepted, funds are moved to an escrow account while closing documents are prepared. Closing documents include a transfer of owner and beneficiary to the purchaser.
Once all closing documents are in order, the funds in escrow are released, providing the seller with immediate access to a lump sum payment in full.