Be Your Own Life Settlement Broker

Copyright 2008 SourceMedia, Inc.All Rights Reserved Accounting Today

August 4, 2008

FINANCIAL PLANNING; Pg. 16 Vol. 22 No. 14

1236 words

Be your own life settlement broker

Zohar Elhanani

As the life settlement industry grows at an accelerating pace, an increasing number of life insurance producers are opting to transact directly with life settlement providers - companies that actively purchase life insurance policies in the secondary market.

While executing life settlement transactions through a specialized life settlement broker is beneficial for life insurance producers who do not have the know-how, resources or desire to transact directly with life settlement providers, producers who do elect to work directly with life settlement providers may benefit from the significant opportunity to execute more efficient transactions, while raising the level of the total policy sale consideration for their clients.

In working directly with providers, producers can earn higher commissions compared to what they would be earning by working through a life settlements broker. These commissions, typically a percentage of the policy purchase price, are determined as part of the overall life settlement negotiation.

Furthermore, producers also can provide optimal service for their clients by engaging in direct dialogue with a provider. Eliminating the need for an intermediary broker can achieve a greater degree of transparency, control and transaction efficiency in evaluating bids, while expediting the overall process.

While the idea of acting as your own broker might seem daunting, many producers have found that working directly with providers is surprisingly simple, and well worth the additional effort. Many providers, such as Legacy Benefits, are pleased to cooperate directly with producers in making the bidding and sales process as smooth and straightforward as possible.

Producers, in turn, must do their part in compiling the necessary documentation for an application package. Such materials include the insurance policy, the policy illustration as generated by the insurance carrier, a medical release form signed by the insured, updated medical records and life expectancy reports. Life expectancy reports provide an analysis of the client's medical history and actuarial life expectancy determination, as prepared by one of a handful of specialized firms.

Producers must also fulfill their fiduciary obligation to their client, the policy owner, by shopping for the highest offer and quality of service from experienced providers. Fortunately, the universe of established provider firms is relatively small.

PICKING A PROVIDER

Producers need to exercise their best judgment and diligence in selecting the qualified life settlement providers. Prior to releasing any information to potential firms for bidding, preliminary research needs to be conducted by following the tried-and-true guidelines below.

* Determine your client's eligibility with the firm. You can save time and minimize your client's exposure by inquiring about the provider's policy-purchasing parameters before providing them with your client's life settlement application. Some firms are exclusively interested in policies that fall within specific age, policy size, applicable state jurisdiction and health guidelines; thus, it is wise to withhold your client's confidential information until you believe that their policy will meet the firm's purchasing qualifications.

* Work with firms that represent institutional, not individual, funding. Almost all life settlement providers are funded by institutional buyers, and for good reason. Institutional buyers clearly understand the asset that they are buying; they also have strong compliance practices and comprehensive legal documentation in place. Most importantly, institutions amass pools of policies and have no interest in the specific life of the individuals involved.

* Few life settlement providers utilize their own capital to purchase policies, along with other institutional client capital that is also at their disposal. This provides for a broader purchasing capacity, and competitive pricing levels given their increased purchasing volume.

* Ascertain errors and omissions coverage. Many providers do not have errors and omissions coverage in place, which covers the producer as well. Even if you have your own, ensuring coverage for all parties in a transaction is a sound business practice to follow.

It is also worth checking into your own policy, as it might not specifically cover life settlement transactions.

* Confirm the involvement of a third-party escrow agent. Once your client signs over ownership of a policy, they are dependent on the integrity of the purchaser to make the settlement payment. Therefore, the involvement of a third-party escrow agent during the ownership transfer is imperative.

* Ensure that the provider is a member of LISA. Membership in the Life Insurance Settlement Association is an indicator of the provider's position and recognition in the market, and ensures adherence to the best practices and guidelines defined by its members.

* Verify that the firm is 100 percent compliant with all state and federal laws. A growing number of states require a license to engage in a life settlement transaction, so perform a basic background check on candidate providers to make sure that they are properly licensed in the applicable state (generally, the state of your client's primary residence). You should also inspect candidate providers for any relevant lawsuits or major complaints that might be filed against them.

* Make sure internal policies are in place to protect your clients. Candidate providers should have a clearly articulated privacy policy to maintain the confidentiality of an individual's identity and medical history. They should also have policies to protect against and identify dishonest business practices, such as the purchasing of policies that are suspected of being issued or sold fraudulently.

It's a good idea to ask for a copy of their policies, as well as for samples of their settlement agreements. A reputable firm should be more than willing to provide such documents.

It's also recommended that you obtain references from other producers who have transacted business with any of the providers under consideration.

BIDDING AND SALES

After selecting the qualified providers to work with, producers should establish the structure of the subsequent bidding and sales process in a straightforward manner.

A suggested approach is as follows: Producers distribute policy information applications simultaneously to all life settlement providers under consideration, with a timetable for obtaining a bid and the auction-end date and timeline. Producers should collect bids from life settlement providers in writing, typically by e-mail. Setting a deadline for bidding is advised, as it maintains an efficient, compliant process, which fulfills the producer's fiduciary obligation to the client and the providers' operational need for timely delivery of bids.

After closing the bidding process, producers should submit the offers to their clients for a final decision, which is typically based on the overall bid consideration and provider quality of service and identity.

In the end, acting as your own life settlement broker can provide optimal service and reward for your clients, as well as lucrative commissions in return for your hard work.

Zohar Elhanani is chief operating officer of Legacy Benefits LLC, a New York-based life settlement provider.

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August 12, 2008