The Power of the Life Settlement Broker Auction Model

Posted: May 21, 2019
By: John Welcom | CEO Welcome Funds, Inc.

Professional financial advisors who identify a life insurance policy that a client no longer needs or wishes to maintain have a couple of options for how to proceed with exploring the potential sale of that life insurance policy in the secondary market. Most of them rely on a licensed life settlement broker to assist them in all aspects of that process and potential transaction, but some are persuaded to work directly with a single life settlement provider.

There are a variety of reasons why most advisors conclude that working with a professional life settlement broker makes this process easier, but perhaps the most important factor to consider is that the use of a broker-managed life settlement auction model is the only proven strategy for maximizing the purchase price on your client’s life insurance policy.

The easiest analogy to consider is a house or other real estate investment that your client might decide to sell. No financial advisor would encourage their client to just pick up the phone and call someone who buys properties, ask them what they’d be willing to pay for their house, and then tell them to draw up the papers. Rather, you would likely advise them to list the property for sale on the public market, entertain as many offers as possible, and obtain the most attractive selling price and/or sales terms for their benefit.

Of course, most of your clients will decide to sell their property with the assistance of a licensed real estate broker, who represents their best interests and is financially incentivized by a commission that rewards them for obtaining the highest price for the property. Likewise, a life settlement broker represents a life insurance policy owner and has a fiduciary responsibility to serve the best interests of that client.

Life settlement brokers have a duty to shop your client’s life insurance policy to available licensed buyers. We believe that the fairest way to conduct this process is to manage an “auction” process in which we invite life settlement providers to submit a bid for what they would be willing to pay for the policy. Simply put, the highest final bid is the winner of the auction.

This life settlement auction model ensures that we obtain competitive bids for your client’s policy and secure the highest possible price for their benefit. A recent case study from our office serves as a shocking illustration of the power of the life settlement broker auction concept. We were contacted by an individual who owned a life insurance policy with a death benefit of $410,000. The consumer had contacted a life settlement provider directly and been offered $14,000 for their policy, a sum they thought was quite low, so they wanted to find out if we could help them secure a higher price. We obtained all of the necessary documentation to submit the policy to licensed life settlement providers in the policy owner’s home state and initiated our auction process.

After a series of competitive bids that saw the price continue to rise on the open market, we ultimately sold the life insurance policy for $175,000, as compared to the $14,000 originally offered by the direct buyer. So even after deducting our brokerage fees, the client obtained more than 10 times the offer received from the direct buyer.

This case study may seem like an extreme example, but the truth is that this same story plays out on a daily basis. A buyer has no incentive to offer their highest price when an advisor or client applies directly to them. The buyer’s objective is to bid as low as possible in order to accomplish their goal, which is to secure the best returns for their investors.

On the other hand, life settlement brokers are obligated by state regulations to represent the best interests of the policy owner during the negotiation process. In fact, did you know that there are 7 states that require licensed brokers and producers to negotiate with more than one buyer? So, if you helped a client sell a life insurance policy in the past and only submitted to one life settlement provider, you may have violated state law in AZ, AR, CA, GA, NY, ND, or WA. By taking a life insurance policy to the open market of licensed life settlement providers, you can literally watch the competitive marketplace tell you what your client’s policy is worth as the offers increase from the first bid to the final bid.

This is the benefit of the life settlement broker auction model — when buyers compete, everyone wins. And that’s a powerful thing.