You play a critical role in guiding your clients towards a life settlement. In the right circumstances, your policyholders could be thrilled to learn that the insurance they no longer want is worth far more than its surrender value. Clients can tap into that value in a legal, regulated process that is similar to selling a home.
When you make those relationship-boosting recommendations, though, your clients are likely to have questions about how life settlements work and who's involved in the process. The life settlement process can be complicated and confusing for policyholders. That's why it's important for you to connect your client with the right specialist for their needs.
That specialist could be a life settlement broker or a life settlement provider. Although both the broker and provider facilitate the sale of a life insurance policy, they operate very differently. You should understand those differences to ensure your client has a positive experience.
What Is A Broker?
A life settlement broker markets life insurance policies to multiple buyers with the goal of negotiating the highest selling price possible. Technically, that goal is also the broker's legal responsibility. Life settlement brokers have a fiduciary duty to represent the policyholder's best interest. They usually fulfill that duty by working hard to maximize the policyholder's cash proceeds.
Brokers use a competitive bidding process to drive up selling prices. Essentially, a broker will invite their network of qualified buyers to review the policy and submit a bid. Through several rounds of negotiation, the broker encourages buyers to stay in the competition by raising their offers. At the end, the broker presents the highest offer to the policyholder for review and approval.
Brokers get paid by a commission taken from the sale proceeds. Typically, the higher selling price a broker can generate as opposed to what a provider can obtain will cover the cost of that commission.
What Is A Provider?
Life settlement providers purchase life insurance policies directly, either for their own investment portfolio or on behalf of another investor. Investors generate returns on life settlements by keeping their purchase and maintenance costs well below the policy's death benefit. Since providers are on the investor side of the transaction, their motivation is the opposite of a broker's. The provider wants the sales price to be as low as possible because that supports a higher return on the policy.
The provider does not manage the details of the transaction the way a broker would. Even though working with a provider is a simpler process -- since there's only one offer -- the policyholder may have more coordination work to do.
Weighing The Pros And Cons
Both brokers and providers can facilitate the sale of your client's life insurance policy. Because the two roles represent different sides of the transaction, there are pros and cons to each. Brokers do take a commission from the sale proceeds, which some clients may view as a negative. Providers do not take any fees; their offer should be what the policyholder receives.
On the other hand, brokers generate higher selling prices than providers. And the broker adds value in other areas, by managing the documentation side of the life settlement transaction.
Making The Best Decision For Your Client
You're invested in your clients having a good experience, particularly when they're pursuing a life settlement on your recommendation. Your clients will ultimately decide whether a broker or provider is the better fit for their needs -- but your guidance can help them make that decision with full knowledge of the consequences.
Lucas Siegel is the founder and CEO of Harbor Life Settlements and Harbor Life Brokerage. He may be contacted at [email protected].