April 18, 2019
Life settlement transactions are frequently very complex and can be time-consuming to conclude. However, the aim of these transactions is generally the same, and that’s to achieve the maximum life settlement offer possible. Since the guiding objective is to determine the fair market value for a given life insurance policy, it’s important to pay attention to the structure and execution of any transaction which is considered. These factors will also have a huge impact on whether or not any deal is actually consummated, so that money is actually put into the hands of a policy owner. Here are some of the most common mistakes which are made, that can have the effect of devaluing your life settlement transaction.
Miscalculating the timing of a transaction
Generally speaking, an insurance policy owner is seeking to obtain a life settlement as a result of some kind of changed circumstances in their life. It could be their health situation, or it could be the sale of the family business, but there’s generally a significant change of life events which is triggering the need for a life settlement. The companies which purchase life insurance policies usually prefer to purchase cases that will sell fairly promptly. Any transaction which causes a delay which will tend to lengthen the process of selling the policy, will make it less appealing to a potential buyer. When timing is upset like this, it can cause many deals to fall through, simply because the buyer may have another policy in their pipeline that can close faster and the funds go to the transaction which closes first.
Having unrealistic expectations
When it comes to evaluating any specific life settlement offer, it will be necessary for a policy owner to have realistic expectations, based on tax implications, replacement products, opportunity costs, and sunk costs. When a client becomes aware that a policy has a certain value today, it’s fairly common for that person to think that it will have an increased value in the future. This is not necessarily the case however, since life expectancy underwriting can have a tendency to work in the opposite direction. Some health issues become much less of a factor over time, and this can have an impact on the value of any transaction. It’s also true that the pricing of a life settlement offer can be fairly dependent on the buyer’s access to funds at any point in time.
Failure to maintain premium payments
It’s always the responsibility of a policy owner to maintain premium payments, right up until the time that a life settlement transaction is fully completed. Regardless of what stage the transaction is in, premium payments must be made until an actual transfer has taken place. Even if a policy slips into a grace period, it may have the effect of diminishing or eliminating any value the policy had.
Failing to provide full disclosure
Whenever a policy owner fills out a settlement application, it’s essential to provide full disclosure to the life settlement broker or provider, so that the true nature of the policy is known. For instance, it should be fully disclosed if a premium has ever been financed in some way, or if there has been a collateral assignment, if there is a policy loan in effect, or if policy ownership has ever changed hands. Without full disclosure, a life insurance policy is not likely to generate any solid offers from buyers.
Not working directly with someone who will solicit multiple offers
Given the fact that there are many potential complications which can arise during a life settlement transaction, you’re always much better off working with a licensed broker or provider that will offer your policy to multiple potential buyers. Both a broker and provider will be able to garner offers from multiple potential buyers, but a broker takes a significant fee in exchange for their service. A life settlement provider is the entity responsible to ensure the entire transaction is compliant with state law (even if you use a broker), gets paid by the buyer, and is able to garner offers from their entire network of investors. Many life insurance policies are just too small for a broker to work with as they need to make their fee too, so working directly with a life settlement provider may get you a higher offer- even if a broker would consider your policy.