Someone who owns a life insurance policy and is starting to do some research on life settlements might be wondering who's the best company to sell your life insurance policy to. Learn more about our life settlement broker services if this is you.
While this is good initial thinking, there’s a lot more to the life settlement market than simply picking a company that has the best ratings because most companies are not going to have public reviews like a restaurant or car repair shop. What you should probably be looking for is a good life settlement broker who can help you navigate the life settlement market to bring you the best offer for your policy.
Best Characteristics To Look For in a Company
Getting back to the main inquiry, what would you define as the best characteristics in companies that buy life insurance policies? Most people would probably say the best company would be the one who pays the most for policies. Another might prefer one that can get it done quicker, though you might leave money on the table going this route, but it may be your only option too if you’re in danger of lapsing or need cash fast.
Another characteristic might be a company that provides creative settlement solutions instead of just an upfront buyout.
If you’re wondering who the best company is to sell your life insurance policy to, as a life settlement broker I would gladly help answer any questions you have, help you seek out the highest bidder, or most advantageous offer, or maybe get you the fastest offer if that’s what you need. In a life settlement contract who does the life settlement broker represent, is a common question we get. Contact us today and we will explain the process in greater detail.
Life Insurance as an Investment
The life settlement marketplace is now a multi billion dollar industry that is considered an alternative investment, meaning non-correlated to the stock market. Many institutional investors such as mutual fund companies need to diversify their portfolio of investments, and because life insurance is a recession-proof industry, investors in life settlements will have the opportunity to grow their money regardless of what happens to the outside economy or stock market. As the market matures, more and more capital is coming into this space making it a great time to consider selling your policy.
There are a wide range of life settlement providers, some of which represent multiple investment funds, while others might represent individual capital. The life settlement provider is the licensed entity that does legal due diligence on contracts before policies are sold, and are now a required part of the process in order for a deal to be done legally.
Life settlements, or life insurance settlements, allow individuals to sell their life insurance policy in a secondary market. A life insurance policy is a tradable asset, for many individuals possibly the most valuable one in their portfolio after real estate and perhaps a retirement account. The fact that the policy is tradable, however, is hardly known to the general public. (1)
A single life settlement provider may be able to represent multiple investors because each one will likely have different needs in terms of what types of policies and cases they’re interested in buying.
One investor might only be looking for smaller policies while another may only be interested in $1MM+. One group might have a lot of policies due to mature soon and need to diversify with longer life expectancies, while another might be in the opposite situation.
And because it’s a marketplace, one group may have been bidding too conservatively on the last few cases they reviewed and didn’t win any. Because they need to spend the capital, they might be more aggressive on their next case in order to win the contract. And the same goes for another group who has a lot of aggressive offers out and can’t afford to add another. Maybe they make a low offer and see how their other cases close before committing more money to another case.
Experienced in Buying Life Insurance Policies
The good news is if you’re not an expert in the life settlement market, there’s no need to try to be. In fact, there’s a good chance you’ll have a hard time or even leave money on the table if you try to do it yourself. Working with a life settlement broker is your best bet at getting the most for your policy in a life settlement. It is always recommended that you get more than 1 offer for your policy before accepting one to ensure you’re getting a good deal.
At the end of the day the investor is trying to get a good deal too. If they don’t have any competition, they can probably get away with offering a bit less than their budget allows.
As an example it’s not unusual when we bring a case to market that one investor decides they’re not interested, and passes on the case. The next one offers $50k, while a couple more offer $40k and $60k. After some back and forth bidding, the group that originally offered $40k has topped out at $80k, while the others can only offer up to $70k. Ultimately you accept the $80k offer, and realize it was worth it to work with a life settlement broker when you may have gladly accepted the $40k deal if you were trying to get offers yourself, or maybe got no offer at all if you only went to that first group that passed.
When an investor reviews a case, what they’re trying to figure out is how much this policy is going to cost to keep in-force for the rest of the insured’s life, and if there’s enough money out of the death benefit to cover the initial settlement, future premiums, and interest to make the investment worthy over time.
If they determine the insured likely has another 10 years based on their current age and health, and the premiums are $25k a year, that means this policy is going to cost $250k in premiums alone over the next 10 years.
If the death benefit on this policy is $300k, that’s not enough money to pay a settlement, pay premiums, and wait 10 years to get any of it back. If the investor paid $25k to buy the policy, they would probably only profit $25k in 10 years, which is not enough gain to tie up that much money over that amount of time. It might barely cover inflation only.
On the other hand, if the death benefit was $500k, the investor might offer $50k. While this sounds like a lot less than $500k, when you factor in the future premiums, the investor will likely spend $300k in premiums and the settlement to own this policy. Yes, they profit $200k, but keep in mind it took 10 years of putting up large sums of money before getting anything back, and this investment actually solves for about a 10% annual return.
If you don’t like these numbers you could certainly keep the policy. If you end up living 10 more years, you’ll still have to pay another $250k in premiums. You will get your money’s worth when the death benefit pays, but it also ties up a lot of cash for the remainder of your life, and many retirees realize they need more flexibility in their investments now.
If they take the $50k and invest it elsewhere, they might make the money work better for them in the long run anyway. Factor in the additional $25k a year that you’re not paying in premiums anymore, and that $50k really increases each year you’re alive in comparison to keeping the policy and paying.
Different Types of Policies
The most common type of policy sold is universal life. Due to the flexibility of universal life policies, they’re not only the cheapest form of permanent life insurance, but they’re also the most likely to lapse or surrender. In fact an independent study found that 85% of the time they don’t end up paying the death benefit because the contract gets terminated by the owner before death by lapsing it or surrendering for the cash value.
Whole life policies can be challenging to sell as they are considered expensive and tend to carry a high cash value, or surrender value. In order for a life settlement to make sense to the seller, an investor would have to pay more than the surrender value to buy it, and oftentimes this number is too high for it to be a good investment. If the policy was started later in life, it’s possible the surrender value is not so high yet, and perhaps we can fetch an offer if the numbers crunch in the right direction for an investor.
Lastly term policies can be sold as long as the conversion privilege has not expired yet. Term is the most common type of life insurance because it offers the most amount of coverage for the least amount of money. Very few term policies end up paying a death benefit, but they are a useful tool for financial protection, and without any coverage an unexpected death can cause financial devastation to a family or business.
What happens when you convert a term policy is the insurance carrier is issuing a new universal life contract without having to qualify again. You could have stage 4 cancer, and they wouldn’t care. They use your original health rating from when you were approved for your term policy, and apply it to the new policy based on your current age. That means if you got a good health rating, that should help get you lower rates on the universal life policy. And if you had a bad health rating on your term policy, you’ll have expensive premiums on your conversion.
Another factor of converting a term policy that’s important is the suicide and contestibility period that all policies have their first 2 years. This is a clause where if you commit suicide in the first two years of the contract the insurance carrier will only return the premiums and not pay the death benefit, but if it happens after the 2 year mark they have to honor it. Also, if you lied about something on your application, the insurance carrier could contest it and not pay the death benefit, unless it’s after the 2 year mark, at which point the contract is set in stone. For these reasons, if you have a new policy that’s less than 2 years old, you can’t sell it in a life settlement. But if you’re converting your term policy to a universal life policy, even though this new policy is “new” they typically wave that suicide and contestability clause making it elligble to be sold now.
If you have a term policy you don’t want to convert it first and then try to sell it. Work with a life settlement broker to order an illustration on the conversion without converting it just yet. We can shop just the illustration around to try to find a buyer. If we find one, oftentimes the term policy ownership will be transferred first, and then the investor will convert it, making for a smoother process. If you convert it before applying for a life settlement, it could reduce your settlement amount because the carrier typically pays a commission to convert a policy. If the agent who converted it is not involved in the settlement, that money will not get counted towards your overall settlement. The other reason is that the premiums are probably pretty expensive to convert it, and we won’t know if we’ll get any buyers at all. I’d hate for you to pay several thousand dollars in premiums only to find out it’s not worth anything to anyone.
If you discover your conversion deadline is just a couple weeks or days away, we can submit the application before the deadline without paying the first premium. This way we don’t lose the opportunity to sell it, and if we don’t get a buyer then you don’t lose any money either.
In the time it takes for them to process the application and issue a contract, we should be able to shop it around and get some feedback. You’ll have an additional few weeks to pay the first premium as well, giving us a little more time to get a deal done. If it turns out that we don’t have any interest, you can simply not pay the premium, and the contract will not go in-force.
Test the Market- Find the Right Company to Help
Testing the life insurance market can take a few months to complete, and some of this time is dependent on how quickly your doctor(s) can send you a copy of your medical records. Pre-covid, clients often would get them in a week or two, but nowadays it seems to take 4 - 6 weeks. Perhaps staffing shortages have caused this slow-down.
We also need an in-force illustration from the carrier to show future costs to keep the policy in force.
Once we have your medical records and in-force illustration we can bring your case to market. Investment groups typically need a couple weeks to underwrite the medical records and get an offer amount approved by the investor. Once offers start coming in, if we have multiple offers then there’s a bit of back and forth on negotiations to see who is willing to bid the highest. Some groups need more time than others, and hopefully we reach an offer amount that is agreeable to the seller.
If you decide to accept an offer, the deal goes into the contract and escrow phase. The life settlement provide will put together a contract that includes legal due diligence to protect both the seller and the buyer. The contract will typically require a doctor’s letter of competency if there is not a power of attorney assigned yet. Also, the insured, the owner (this might be the same person), and the beneficiary all have to sign as well so there are no surprises when the insured passes.
For the investor, they want to ensure that they will own the policy free and clear of any obligations to creditors, bankruptcies, divorce decrease, etc. Once these items are satisfied, the change of ownership and beneficiary forms are submitted to the carrier. Processing these can often take 2 weeks, and must be documented on carrier letterhead to reflect the new ownership. When this has been satisfied, the settlement is released from an escrow account via wire transfer or live check, and the settlement is considered done. Up until this point, the policy is still considered to be owned by the seller if something were to happen. And depending on which state you live in you may be able to overturn the settlement up to 2 weeks following the receiving of your settlement.
If you still have questions such as "who does a life settlement broker represent" or "will you be able to help me with my situation," reach out to us today. If you want to find the best company to sell your life insurance policy to, contact us at 213.784.1481 or use our free appraisal form to get started.
Zack Taylor
4 years in life settlements
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