The Tax Cuts and Jobs Act (TCJA) contain two provisions impacting life settlements. The TCJA expanded the estate tax exemption while also changing how life settlements are taxed. Both of these changes created a renewed level interest and research for agents and consumers. Avoiding a lot of the industries known pitfalls like the releasing of private information and lengthy time wasted between applications, medical reviews and generating settlement offers, agents can now prequalify a senior clients life insurance policy to get the current market value. This helps skip many of the historically cumbersome steps an agent and senior used to endure to sell a policy. An agent no longer needs a middleman broker to oversee and protect their interests in the transaction.
Can a Prequalification Really Help?
Finding a qualified person to prequalify a life settlement isn’t always an easy process. In the past, it was common to partner with a life settlement broker. These professionals can facilitate negotiations to protect your interests during a life settlement auction, but at a steep price to your client. The life settlement broker is marketed as a commissioned or compensated, individual or entity, that is used to negotiate a settlement in the interest of the policy seller. Unfortunately, this comes at a cost to the insured that can destroy privacy as they release financial and medical records to an industry of companies and their investors.
A broker will often require you sign an engagement agreement with the policy owner and hope to “design” a case to maximize market value. Following all of the HIPAA procedures is also required in keeping personal information safe, but this document usually only allows them to request your medical records and share them with as many people as possible to secure bids. A broker implies a negotiation process, but the offers usually insert a hefty commission that has been removed before sharing a competitive offer received from their auction. Unfortunately, this engagement agreement usually locks you into working only with them to complete the settlement.
Working with a life settlement broker can sometimes gain a better deal compared to working directly with a provider. A life settlement broker usually works with 3-5 provider companies to create an auction or competition to help leverage a higher offer. These providers, or funding companies, are people that manage the money to be invested by their investors. This too comes at a cost to the sellers. Keep in mind that these offers have built in commissions to their brokering firm and the funding company. The offer received should be higher and match the current market value.
Another confusing aspects of life settlement funds is who represents whom. Many direct marketers and buyers can easily mislead sellers due to this confusion. Always performing due diligence is important before you partner with a life settlement broker. Here are a few questions to consider asking life settlement companies or brokers.
1. How long have you worked in the life settlement industry?
2. Do you offer bid transparency?
3. Can you give information to validate your reputation as a life settlement broker?
4. How do you handle private medical information?
5. Have you or any of your team members been involved in litigation related to life settlement funds?
Asking all of these important questions can help you determine if a life settlement broker is a good fit or if you need to look elsewhere.
Changing Environment
A large number of individuals are now looking at ways to fund their long-term care needs due to the possibility of outliving their savings. Receiving life settlement funds is one way to gain much-needed liquidity for long-term care. An added benefit would be the option to contribute financially to their adult children instead of forcing them to use their own money to take care of their parents. Ultimately, this gives your family members more freedom without worrying about any financial constraints.
Seniors are often better served by getting data about a life insurance settlement from their advisors. On the other hand, buyers do not have any obligation to tell you what is best for the owner. However, a life settlement advisor has the responsibility to protect their clients in helping them obtain full value for their policy. An advisor should perform a policy appraisal with an experienced and recognizable settlement industry professional. Obtaining a proper prequalification and representation is essential.
Valuable Asset
Life insurance is usually one of the most valuable assets for a client, as it can easily be appraised like any other asset. Requesting an independent life policy appraisal from a qualified professional is important in helping you get the most value from your life settlement funds. A life insurance policy appraisal will ensure a fair process if you choose a qualified appraiser.
Life insurance used to be considered a hard-to-value asset, but that is no longer the case. The marketplace for life settlements has grown to a point where you can easily compare market data that’s readily available. All of this information has made it possible to create a methodology for life insurance valuation that reflects the true value of the market.
Closing Thoughts – Life Settlement Best Practices
Following these best practices is important to ensure each client receives maximum value for their policies. Requesting an appraisal is also a good idea if senior clients plan to make any changes to their cash-value life insurance policy. Following all of these tips is always well worth the effort to ensure that clients gain full value from their life insurance settlement options.
