"It is a very fluid, dynamic business right now," confirms Ernest Jordan, a senior vice president at industry heavyweight Peachtree Life Settlements, in Boynton Beach, Fla. Even some of those who have cried the loudest about the upstart industry-the life insurers-are entering the fray. The Phoenix Companies now claims to be the first carrier buying unwanted policies from contract holders.

In a life settlement, the insured sells his or her policy to a buyer-cum-investor who takes over the premium payments and collects the death benefit. Perhaps the seller is replacing the contract with superior coverage, posits Jordan. Maybe its original purpose, such as estate planning, no longer exists. Regardless, in the past, an insured's only option, other than to let the policy lapse, was to surrender it for cash value.

But that's a mere five cents on the policy-face-value dollar, according to the Life Insurance Settlement Association, the industry's big-tent trade group. In contrast, policies fetch four to six times that in today's life settlement secondary market. So advisors who ignore the arena aren't doing their best for clients.

The real issue is knowing where to turn in this rapidly-evolving marketplace. The LISA Web site, www.lisassociation.org, lists among its members 38 providers, or companies that buy policies for investors and sometimes their own account, as well as 58 brokers that can connect you to them. Another useful roster of names resides at www.livesettlements.net (scroll to the bottom of the screen). But before you can wisely choose with whom to work, some perspective is necessary.

How We Got Here

The life settlement industry is the legatee of the viatical settlements business, which arose in the early '90s to buy policies from AIDS patients who wanted cash during their lifetime. It even inherited the trade association; LISA dropped "viatical" from its name circa 2004.

The young industry has been a little devil at times. Controversial behavior has drawn high-profile lawsuits such as the one TV personality Larry King brought last fall against an East Coast agent. "Many perceive the industry as sleazy," deadpans one well-known financial-services market researcher.

But good might yet triumph. Dubious conduct may have unwittingly sown the seeds of its own destruction. It wrought the need for greater professionalism and created opportunities to improve marketplace efficiency. That has attracted newcomers who are raising the bar for everyone in the game.

"You're seeing more market entrants who want to play 100% by the book," observes Nate Evans, president and CEO of one of the very largest providers, Maple Life Financial in Bethesda, Md. "Similar to other emerging asset classes, life-settlement transactions were initially opaque, at best. Now there is a push towards the transparency and solid business practices that you would expect from a mature marketplace," Evans says.

Much of this trend owes to the appetite Wall Street has acquired for life settlements over the past year or so. A trade group formed by and for large institutions in early 2007, the Institutional Life Markets Association (www.lifemarketsassociation.org), aims to develop industry best practices. Experts say that houses such as Goldman Sachs and Credit Suisse represent much of the money behind, and increased impetus for professionalism in, the business right now.

But How Big Is It?

No one really knows the industry's size. The providers are privately held companies. States don't have the data. And there is no central clearinghouse through which all settlements run, says R. Steven Orr, president of Baltimore-based Life Settlement Providers LLC and a former Maryland insurance commissioner.

Despite the lack of hard numbers, LISA estimates that in 2007, $15 billion of policy face value changed hands, up from $12 billion in 2006. A much more conservative figure for 2006-$6 billion-is offered by Conning Research & Consulting, a Hartford, Conn., firm that has studied the industry since 1999. There is widespread consensus, however, that the business is growing.

Until recently, advisors had just two ways to sell a client's unwanted policy. Keeping in mind state insurance-licensing laws, of course, you could solicit bids directly from providers, or engage a broker's broker to do it. Now alternative venues are showing signs of life, the latest of which by the time you read this could be Institutional Life Services, an electronic marketplace backed by Goldman, Genworth Financial and National Financial Partners.

Each approach to helping a client sell a policy features unique pros, cons and how-tos for the advisor. Yet the goal is the same for all of these paths: to create a competitive bidding environment for the policy.

Going Direct

The proportion of advisors, attorneys and other financial professionals who approach providers themselves is rising. "Maybe 5% of our deals came in that way when we started in the business in 2004, and 95% through a broker's broker," says Stephen Shapiro, president and CEO of Q Capital Strategies, a provider based in New York and Boca Raton, Fla. "Now it's 30%/70% and that will flip in time."

There are two significant benefits: the client avoids paying a broker's commission and you avoid giving another practitioner access to the client. But to land the best deal (read: fulfill your obligation to the client), it takes legwork and a feel for the market. "You need to know what providers want, which ones are being aggressive and what constitutes a good offer," says Orr. Some advisory shops bring specialists in-house to handle the task.

The first step in going direct is to identify several providers (to engender competition) whose buying criteria regarding policy type and size, the insured's life expectancy and so forth match your case's characteristics. For example, Orr's company buys variable life; Maple Life does not. Orr only looks at cases with life expectancies between two and 10 years; Maple Life goes out to 20 years.

Once it's clear who will play ball with you, you could discover that some are more enthusiastic than others. "When a provider builds a portfolio of policies, he doesn't want too much exposure to any one carrier or health condition," explains David Kleinhandler, an independent insurance advisor in Manhattan. For instance, policies on cancer patients might be desired if the portfolio already includes numerous heart-disease cases. The provider may therefore be willing to pay a premium for what he needs to complete the portfolio, Kleinhandler says. "We try to find out who has the hot money for the client's potential health problems, then negotiate with two or three buyers. It all boils down to competition for the policy."

Additional Criteria

But a handsome bid is worth nothing if the buyer doesn't come through. As Shapiro relates, "Frequently a seller will come to us saying, 'I went with the provider who made the highest offer and now at the last minute they can't close the deal. Can you?'" You want to use an established settlement company with a track record of performing. Ask providers about their tenure in the business, their volume and the types of transactions they have handled, says Scott Hawkins, a vice president at Conning Research.

While you're at it, ask how the provider gets its money, he adds. Avoid deals where the contract will be resold to an individual investor. Funding should be institutional.

It also should be diverse. In this credit crunch, transactions have failed when the provider's funding dried up. Seek settlement companies with multiple capital sources, Hawkins advises.

Multisourced funding aids sellers in another way. It widens a provider's ability to buy, explains Zohar Elhanani, chief operating officer of Legacy Benefits LLC, a New York City-based provider. The company, which partnered with Merrill Lynch on a pioneering life-settlement securitization transaction in 2004, buys for banks, hedge funds and other institutions. "We also buy utilizing our own capital when policy characteristics meet our criteria, enabling expanded purchasing," says Elhanani, adding that his business nearly tripled last year and is presently industry Top Five.
How the provider protects personal information is also important. Ask how confidential data such as the client's Social

Security number and medical records will be treated. At Q Capital, "we minimize printing of documents and keep files locked to prevent information leakage," Shapiro says. "The platform we built displays to employees only the data they need to get their jobs done."

Ultimately it's all about integrity. If your state regulates life settlements, contact the insurance department to verify that the provider is licensed and determine whether it's in good standing. "If there are a lot of issues with the company, you'll find out," says Orr, the former regulator.

Somewhere along the way you should query colleagues about which providers are good to work with. When we did that in a random, completely unscientific manner, numerous companies were mentioned but three were cited particularly often:  Q Capital, Legacy Benefits and Life Equity LLC of Hudson, Ohio, which was founded in 2000 and now claims to be No. 3 in the marketplace, having grown to about 70 employees from less than two dozen two years ago. "I think we have established ourselves as a company that makes fair offers," says Life Equity's managing director of business development, Stephen Washington. "We understand how to price policies."

The Broker's Broker

If the foregoing sounds like a lot to bite off, then you understand why Orlando-based Advanced Settlements Inc. will broker $2 billion in settlements this year. "A broker canvasses the market while you focus on what you do best. A good broker has his finger on the pulse of the market and knows which reputable providers are buying which types of policies," says Scott Kirby, co-president of Advanced Settlements, formed in 2000.

The client pays for that, of course, and there are question marks. "The big one is, 'Did the broker get the real value for that policy?'" says Kleinhandler, the Manhattan insurance advisor. You put your trust in the broker to earnestly make the rounds on your behalf and not just shop his buddies.

How does one choose a broker?  Kirby suggests looking at the number of providers the brokerage typically solicits, whether all offers received will be fully disclosed to you, the firm's experience, regulatory record and its privacy safeguards. You don't want a broker indiscreetly papering the marketplace with your client's data.
Be wary of brokers who try to hustle the transaction. Giving document gathering short shrift at the start of the process sets up the deal for failure. Finally, look for errors-and-omissions coverage, which some brokerages provide through their E&O carrier on the transactions they close.

If you opt for a broker, consider dipping one toe in first. Other advisory shops do that, reports Jon Mendelsohn, president and CEO of Ashar Group LLC, a broker in Orlando. "We have had many instances where a high-end planning firm asks us to handle a $300,000 policy, we take care of it, and the next thing you know they're sending us a $10 million policy on the same insured," Mendelsohn says.

Potential Paradigm Shift

Electronic exchanges could be The Next Big Thing in the marketplace. Here sellers and buyers meet certain standards, policies are put up for auction and the bidding begins. The exchange charges a fee, naturally. But the case gets in front of multiple buyers and no one horns in on the client-advisor relationship.

Another payoff is . . . the payoff. Policies have been going for higher prices on LexNet, the 2007-launched exchange operated by Cantor Fitzgerald LLP, than in the secondary market generally-31 cents on the dollar, versus something in the 20s, according to Stuart Hersch, president and CEO of Cantor LifeMarkets.

Cantor is a good example of one of those well-intentioned recent entrants. "We looked at the marketplace and saw a lack of transparency," Hersch says. "We thought that by operating as a neutral intermediary with good processes, we could make for a more efficient marketplace."  Those processes include carefully redacting all personally identifying characteristics on documents that potential buyers see, along with disclosing all items of compensation, which Hersch says has led to commission compression.

Kleinhandler, among others, believes there will come a sunny day when full disclosure of fees at all points in the life-settlement chain is standard procedure. The market will be more efficient then, and clients will benefit, he says. "When everyone knows what everybody else is making, there is room for the insured to profit."