Agents and Advisors, Life Settlements and Compensation

Although life settlements are increasingly popular as a liquidity solution for cash-strapped seniors, they're still a subject of confusion for many financial professionals.

To clear up the big question straight away, life settlements are completely legal. They're regulated in most U.S. states to protect policyholders, investors, life settlement brokers, and insurers from fraud.

As well, it's also legal for financial advisors and licensed life insurance agents to receive compensation for facilitating a life settlement. Depending on the situation, that compensation can come in the form of referral fees, override fees, commissions, or earnings on the client's reinvestment of the proceeds.

Here's a deeper look at those earnings opportunities and how they apply to financial advisors and licensed life insurance agents.

Referral, Override and Reinvestment Fees

Financial advisors operating in a fiduciary capacity normally would not receive a commission for facilitating a life settlement transaction — but they can earn referral fees, override fees, and reinvestment fees.

Referral fees and override fees are based on the face value of the policy that's sold. Typically, the advisor and life settlement broker would negotiate the fee percentage based on the details of the situation, but it might be in the range of 0.10% to 0.25% of the policy's face value. An advisor might refer a client who has a $500,000 life insurance policy to a life settlement broker, for example. A negotiated referral fee of 0.25% equates to $1,250 in earnings once the transaction closes — regardless of the policy's selling price.

The advisor or agent with access to a large network of other advisors or agents could also negotiate override fees, to earn on every life settlement that's initiated through his or her network.

As an example, say Advisor A refers Advisor B to a life settlement broker. Advisor B has a client with an unwanted life insurance policy and introduces that client to the life settlement broker as well. If the client proceeds with the sale and the transaction closes, Advisor A earns the override fee and Advisor B would earn the referral fee.

Advisor B will also benefit from an increase in asset management fees if the policyholder decides to direct the life settlement proceeds into an investment account under management. That's not a self-serving recommendation on the advisor's part, either. It's often the right move to make when the policyholder's primary financial concern is long-term solvency in retirement.

Most advisors won't earn commissions on life settlements. The exception is if the advisor is also a licensed life insurance agent and that advisor's broker/dealer allows for commission earnings on life settlements. In that case, the commission structure explained below would apply.

Licensed Life Insurance Agents and Commissions

Life settlement brokers earn commissions, which are calculated as a percentage of the policy's closed sale price. A licensed life insurance agent who facilitates a life settlement with a broker should collect a piece of that broker's commission. The size of that piece is negotiated between the agent and the broker, but it might range from 40% to 70%.

The referring agent does not need to be a licensed life settlement broker, either. And, the commission can be earned on permanent life insurance policies as well as term policies that are converted and then sold.

If the policyholder intends to use the life settlement proceeds to purchase an annuity or another insurance product, then that's obviously a commission-earning opportunity for the agent as well. Annuities are easier to structure following a life settlement, too — because the agent should have access to the lifespan report that was prepared during the life settlement underwriting process.

Maximizing Earnings on Life Settlements

Both advisors and agents interested in establishing a referral relationship with a life settlement broker should choose that broker carefully. The broker with the strongest track record for procuring multiple bids and negotiating high sale prices will generally be the best partner for both fee-earning advisors and commission-earning agents.

Here's why: Commission-earning agents obviously benefit directly from a higher sale price. But fee-earning advisors also benefit, albeit indirectly. The higher the bid amount, the more likely it is the policyholder will accept and ultimately close the transaction. And the higher the proceeds, the happier the client, and the more liquidity available to restructure that client's finances.

Life insurance policies sell for about 20% of face value on average.

Financial advisors and licensed life insurance agents can legally and ethically earn for working with a life settlement broker to help clients liquidate unwanted life insurance. On an individual transaction, the size of the policy is a primary factor in the earnings potential for the advisor or agent. But over the longer-term, the quality of the broker may be equally important. A recognized, high-volume broker will generate the best results for policyholders and the highest earnings for the referring agent or advisor.

Lucas Siegel is the founder and CEO of Harbor Life Settlements, a life settlement company, and Harbor Life Brokerage, a life settlement broker.