Telling It Straight: Why Clients Should Insist on Multiple Offers before Selling Life Insurance Policies
June 05, 2018
It’s the word on the street. Greater numbers of investment clients and other consumers are making their expectations known when it comes to working with financial professionals in order to ensure the advisor has their best interests at heart.
Whether it involves candid discussions about asset management fees, product suitability, or how to maximize investment returns, savvy clients are demanding straight talk from advisors and insisting on greater transparency.
In terms of life settlement transactions, some advisors tell us they are taking calls from clients seeking straight answers regarding advertising campaigns for life settlements that have appeared on TV, radio, and even Facebook. Clients want to know whether they should accept an offer for the purchase of their policy from the company (typically a provider) running the ad, or whether they should work through their advisor and a life settlement broker to shop the policy for competing bids in pursuit of the highest offer.
In an era where fake news can be transmitted at the blink of an eye through media outlets competing for clicks in a 24-hour news cycle, it’s important for financial advisors to be ready with the facts when clients demand answers and transparency.
Be ready. Help your clients make informed choices by forwarding a hyperlink to a journalistically-balanced and factual online article. For example, CNBC recently published a well-written article about life settlements in its Straight Talk column entitled, "One option for your unwanted life insurance policy: Sell it". In addition to explaining how life settlement transactions work, the CNBC finance reporter cautions readers to “… shop your policy around, because there can be a big variance in the amount offered by different life-settlement companies."
In other words, don’t just accept one offer from one provider, but make sure you use a life settlement broker to generate offers from multiple providers and negotiate the highest possible offer for the seller’s policy.
Life Settlement Brokers have a fiduciary duty to represent the policy seller’s interests
As illustrated in our infographic The Three Stages of the Life Settlement Process, the broker is an integral partner in each life settlement transaction. The diagram illustrates clearly that the primary function of the settlement broker is to submit the seller’s policy to multiple money sources (providers) in order to create a bidding competition in pursuit of the highest offer. Brokers must be knowledgeable about each provider’s purchasing guidelines and submit policies that align with the provider’s investment objectives.
In the typical life settlement transaction, the broker will shop a policy to multiple licensed providers. Depending on the state in which the policy seller resides, this could involve 10-12 licensed providers, and the broker will typically receive approximately two to four bids.
When a life settlement broker shops the policy with the goal of achieving the highest bid, the broker is demonstrating a fiduciary duty to the policy seller. The broker’s mere involvement on behalf of the policy seller signifies to the marketplace that there is a competitive rivalry for the purchase of the policy, which often motivates providers to outbid each other. This is exactly what the policy owner would want to happen.
At the conclusion of the transaction, the broker receives a commission which must be disclosed by law to the policy seller. However, the provider’s compensation is built in to the purchasing price and state laws do not require that they disclose their processing fee (compensation) to the policy seller.
Providers represent their investors’ interests to acquire policies as cheaply as possible
The primary role of a life settlement provider is to function as a purchasing conduit for their institutional investors (money sources) who are seeking to acquire policies for inclusion in their investment portfolios. Each provider will typically have two-to-four institutional money sources, and each money source will have different investment horizons which drive the acquisition price that the providers are willing to pay for each policy.
When a provider purchases a policy from the insured, the policy owner is compensated with a lump sum cash payment. The provider who purchased the policy agrees to assume all future premium payments until the policy matures (death of the insured). In representing the best interests of their investors, providers are seeking to purchase policies as cheaply as possible. Policies with lower annual premiums and minimal loans are often more attractive to providers than policies that are more costly to purchase and maintain.
Promote Transparency. Be Prepared.
When clients call your office seeking facts and transparency about selling their life insurance policy, be prepared. In addition to sharing the link to the CNBC article with your clients, advisors are encouraged to share the hyperlink to this blog article by Asset Life Settlements. Your clients will appreciate being educated about a topic that is often fodder for fake news purveyors.
If you have a potential life settlement case, feel free to call us at 855-768-9085. Or, complete our online Pricing Analysis form and someone will contact you immediately.