Choosing the Right Life Settlement Broker

Ovid Blog - Professional

A life settlement transaction provides the owner of the policy with a cash payout that is less than the death benefit but more than its cash surrender value. For many people who are retiring, suffering from a terminal illness, struggling with high premiums, or simply no longer in need of their policy coverage, a life settlement may present the ideal solution.

The demand for life settlements is growing. In 2015, investors purchased $1.7 billion worth of life insurance from consumers. If you are considering selling a life insurance policy, it’s natural that you’ll have questions about how to find a broker that will help you get the highest payout for your policy.

This single transaction could represent a large amount of money. Finding a great broker or partner who will get you the settlement amount you want for your life insurance policy quickly, while remaining compliant with the applicable life settlement regulations is of the utmost importance.


The life settlement industry is well-regulated

Life settlement brokers are held to a high standard of conduct that includes specific regulations and rules put forth by the federal and state government. Some of the first states to regulate how life insurance brokers operate were New York, Illinois, and California. As of October 2016, 90% of the US population enjoys protection under life settlement regulating laws.

The Life Insurance Settlement Association (LISA) is a resource for reliable and up-to-date information about the life settlement industry and the specific state-by-state rules that life settlement brokers must follow.

The broker you choose should be familiar with the rules and regulations governing the potential transaction, as these laws will have an impact on the process of selling your policy. Most states put forth the following requirements regarding life settlement transparency:

  • Forms used for the life settlement contract must be approved
  • Brokers must disclose the compensation they’ll receive
  • Consumers are entitled to receive all applicable alternatives to settlements
  • Consumers are entitled to the opportunity to review all offers and counteroffers
  • Life settlement companies must follow all federal and state privacy laws
  • Life settlement companies must show, by providing the state with their anti-fraud plans, that the policies they purchase are obtained and are being sold legally
  • Consumers are entitled to receive information about how accepting a cash payout for their life insurance policy may impact their tax obligation and government assistance


You no longer need a traditional broker for life settlements

While many people who go through the process of selling their life insurance policy use a broker, there are viable alternatives. Finding a direct life settlement provider on your own may save tens of thousands of dollars in commissions and fees. For instance, you can use Ovid’s matching tool to be instantly connected with buyers interested in your specific policy. These buyers are capable of dealing directly with consumers.

It can help to have a financial advisor that is well-versed in the life settlement arena and who has valuable connections with direct life settlement providers. Before choosing this option, be sure to speak with your financial advisor about fees or commissions they charge when they help their clients navigate a life settlement. It’s also a good idea to verify that they have experience with the process of selling a life insurance policy.

Consumers can get more than one offer when they are trying to decide whether to participate in a life settlement. This hands-on approach may help them keep much more of their life settlement. A large life settlement provider will only give one quote, so getting multiple offers a process that the consumer must handle themselves.

When choosing a life settlement provider be sure to:

  • Understand the applicable laws in your state that govern life settlements and protect consumers
  • Read the provider’s privacy policy carefully
  • Ask your financial advisor to get more than one offer

For some people, working directly with buyers presents an advantage because a direct life settlement provider is motivated to simplify the process to make it as easy as possible for the seller. People who are living with a serious disease, retiring soon, or facing a lapsed policy if they stop paying expensive premiums often consider closing a settlement quickly a high priority.


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Understanding how brokers make money

Like professionals in any industry, life settlement brokers are paid to perform a service. It’s common for a broker to collect a commission, or a portion of the proceeds of the life settlement amount. While there isn’t an industry-wide method by which all life settlement brokers make money, there are three common fee structures.

Possibly the easiest to understand is the commission model. In many situations, a life settlement broker’s commission is 6% of the face value.

Commission example:

  • Policy Face Value: $800k
  • Cash Surrender: $40k
  • Life Settlement Offer: $120k
  • Broker’s Commission: $48k

Another way that life settlement brokers are paid is through a percentage of the offer. This percentage varies, and may be as high as 30%.

Percentage of Value example:

  • Policy Face Value: $800k
  • Cash Surrender: $40k
  • Life Settlement Offer: $120k
  • Broker’s Commission: $36k

In a “value created” fee structure, the broker has incentive to get the consumer the best possible offer for their life insurance policy. The broker will take a percentage (in this case 30%) of the value they create through the life settlement offer for the consumer.

Value Created example:

  • Policy Face Value: $800k
  • Cash Surrender: $40k
  • Life Settlement Offer: $120k
  • Value created: $80k
  • Broker’s Commission: $24k

An experienced broker will solicit several offers for one life insurance policy to help you get the most amount of money from your life settlement agreement. Ideally, their deep understanding of the market and the competition helps them to obtain the highest possible purchase price for your policy.

Tips for choosing a life settlement broker

When choosing a life settlement broker be sure to:

  • Ask for full disclosure of their fees and commission percentages
  • Understand the broker’s fiduciary duty to the policyholder
  • Ask about potential conflicts of interest
  • Verify that the funds will be placed in escrow during the final phases of signing over your life insurance policy. This ensures an added layer of protection and is a standard industry practice.
  • Remember that you own the life insurance policy. It is your asset. If you are uncomfortable at any point in the process, it’s well within your rights to simply walk away before the deal is signed.

There isn’t a formula for selling a life insurance policy as part of a life settlement for cash that applies to everyone. The life settlement market has many moving pieces. Your policy may be worth more or less depending on your age, health status, the face value of the policy, and the price of the premiums. The broker or financial advisor you choose to represent you throughout the process of selling your life insurance policy should be someone who can get you the most money for your policy.

Working with a life settlement broker has advantages and disadvantages that vary depending on the individual, their state of residence, and their situation. As with any major financial decision, it’s important to take your time and make sure you are completely comfortable with every step of the process as well as the potential outcome of your decision.

About Ovid

Ovid is a life settlement exchange. We instantly match you with institutional buyers who are interested in your policy, based on you and your policy profile. Getting an offer for your policy from Ovid buyer partners is completely free. If you do want so sell your policy, Ovid has proven to help obtain average payouts above the industry average. We’re based in San Francisco and have been featured in Forbes, US News, Business Insider for the incredible work we do for consumers. You can learn more about Ovid here.