For starters, know that it can feel ghoulish. Those who buy your policy on the secondary market are looking for sellers who are over age 65 and have limited life expectancies. The reason is that when you die, the buyer gets the death benefit of the policy.
Just the thought can sound creepy, but these deals can also be a profitable way to liquidate a life insurance policy, rather than cashing it in. They're called life settlements. And it's an investment game played by sophisticated investors.
On the downside, it's a buyer's market right now. "You will get lower payments today than three or four years ago," says Steve Leimberg, publisher of Leimberg Information Services. Life settlement prices can be up to 50 percent lower.
There are several ways to increase your return, though. They include getting an independent appraisal, fielding multiple bids and capping transaction costs where possible. Doing your homework pays off in this realm. Start by visiting the Life Insurance Settlement Association's website.
Navigating the life insurance settlement market can be tricky. It's policed by states, not the Securities and Exchange Commission, so regulations vary. There's no standard commission structure. Also, the secondary market isn't transparent, so buyer quotes vary widely. "You can't go on the Web and make comparisons," says Leimberg. "You'll go bananas." Each settlement case is individual, so there are no cookie-cutter guidelines.
Buyers do have policies they covet. They're larger policies close to $1 million where the issuers are rated "A" or better, says Leimberg. "They're also looking for universal life policies with low or flexible premiums," he says. "They want to pay as few premiums as possible." You're likely to get lower offers for other policies.
The key to success is dicing this complex process into these five small steps.
Consider hiring an independent adviser. These experts offer independent appraisals of what your life insurance policy is worth. They can also tell you about features that may add value, says Glenn Daily, a fee-only insurance adviser in New York City. "And they can recommend brokers."
Interview at least three brokers. Daily advises sellers to pepper prospective brokers with questions. What can you do to improve the offers I get? What's your commission structure? Is it negotiable? Are you licensed in your state? Are you willing to give discounts if I pay for medical expenses?
Round up your paperwork. Medical records are crucial to getting price quotes. And buyers want lots of medical information on you. "We need a five-year medical history, including primary doctor and specialists," says William Mountain, CEO of Institutional Life Settlement Advisors in Hollywood, Fla. He adds that these records can cost a few hundred dollars.
Watch transaction costs. These costs can easily eat up your profits. Your broker gets a commission. Leimberg says that brokers can charge as much as 30 percent to 50 percent of the gross policy price, or as little as 5 percent to 15 percent. "But brokers are willing to negotiate these days," says Daily. "You do have some leverage."
But that's not all. Deals can take up to six months to close, adding costs. So it's important to know what your net amount will be after everyone's fees are dished out, says Leimberg. And when you know, get something in writing.
Get competitive bids. Offers can vary widely. "That means going to any and all potential suitors," says Mountain. "People think one or two bids are the end all and be all," he says. "But this is a completely negotiated market. One offer gets doubled and tripled by another company."
Mountain says you'll also need a copy of your original policy. "You want to give buyers all the data upfront," he says.
Don't rush though, even if it's a fire-sale deal, says Daily. "Take the time the process deserves."
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