1. Does the broker you are using treat this transaction as a security?
Why is this important? When a company treats this transaction as a security, it means that it is not only held to state insurance regulations governing the business but also must adhere to laws and practices relating to security transactions. This requires the company to perform such tasks as due diligence on all funding sources, full disclosure of both compensation and offers, and employ a negotiating process that assures best execution on every transaction. Simply put, by treating the transaction as a security, a company can minimize the risks associated with conducting a life settlement.
2. Are the company’s funding sources exclusively institutional and are they licensed in your state?
Why is this important? In a life settlement transaction, the policy is being sold to a third party. Because the third party receives its return on investment only when the insured passes away, it is extremely important to know who is buying the policy since they have an interest in the insured’s passing. With institutional buyers, these policies are held in large blind trusts to assure client confidentiality.
These trusts may own hundreds of millions of dollars of life insurance so that performance is not based solely on the longevity of a single insured. Investors experience returns based on the performance of the entire pool of assets. With this in mind, you can see how important it is to ensure you are selling policies only to institutional funds that have undergone a rigorous due diligence process. The requirement that providers are licensed in your state provides an additional level of protection provided by state oversight reporting.
3. Does the company work with several different licensed life settlement providers?
Why is this important? Life settlement offers may vary widely among providers and are very sensitive to variables such as the insured’s life expectancy (LE), the policy’s premium requirements, market interest rates, and the status of each funder’s current portfolio
For example, at any given time, one company may have a large inventory of policies insuring individuals with short life expectancies. To balance its portfolio, the company will need to buy policies where the insureds have long LEs. Thus, for a limited period, the company will have “strong money” and will make more aggressive offers on long LE policies.
There are numerous circumstances that cause one company to have “strong money” at one point in time, and then a completely different company to have “strong money” only weeks later. For this reason it is important to shop policies among a large number of institutional providers in order to capture the “strong money” in the market at any given point in time.
4. Does The Company Negotiate Offers Through A Formal, Written Bid Process?
Why is this important? Because it is impossible to predict exactly which providers will have the strongest money at any given point in time, it is crucial to have a consistent and written process that finds this money for you. A formal, systematic bid process that forces all providers to play on the same level playing field and awards cases strictly on the merit of the provider making the highest offer – allows consumers to know they are receiving a true fair market value for the sale of their policy.
5. Is The Company’s Compensation Uniform and Capped With All Providers?
Why is this important? Uniform and capped compensation assures that the interests of the broker and your advisor are aligned with obtaining and presenting the highest offer for the client. For this reason, both clients and their advisors should insist that the broker demonstrate in writing that compensation is both uniform and capped.
For example, if compensation is not uniform with all providers, the broker you are using may have an incentive to push business to the provider that offers them higher compensation, which may or may not be the provider that offers the client the most money.
Capped compensation should be required as well to ensure that the company has a ceiling for the level of compensation it receives for brokering a transaction.
Over the years there have been regulatory actions by some governmental agencies, such as a task force investigating life settlements, which was prompted by providers that offered bribes (called co-brokering fees) to steer business their way at a lower price than the client would have
otherwise received. This is an unacceptable practice and the reason why the broker should be asked to demonstrate in writing that compensation is both uniform and capped.
6. Are Both The Offers And The Total Compensation Fully Disclosed?
Why is this important? In addition to requiring uniform and capped compensation, consumers should demand that all offers and total compensation to all parties be fully disclosed. Full disclosure is perhaps the most important way to assure that your interests are protected and that you are making an informed decision. Forty-Two states have passed regulations which require full disclosure. There are still states that do not require compensation disclosure and have not enacted regulations. Clients should be proactive in seeking full disclosure of all offers on the table as well the compensation paid to agents and brokers facilitating the life settlement transaction even in a non-regulated state. Only a company willing to disclose this information should be worthy of your business.