Viewed as targeting older policyholders, the US life settlements industry has begun looking to younger baby boomers as a source of supply of policies. This comes at a time when the life settlements market is recovering from the impact of the recession that curtailed available capital, reports Charles Davis.
As the US market for life insurance settlements continues to grow, producers conducting the transactions are continuously looking for new ways to attract advisers and encourage them to include life settlements among their offerings.
Life settlements have grown exponentially in the US despite the fact the baby boom generation, which has started reaching retirement age, has been out of reach for more traditional life settlements, which typically look for policyholders roughly 70 years of age or older. But now, a focus on that market has started to emerge.
So-called ‘early life settlements’ are focused on bringing term policies held by clients as young as 55 to the settlement market after converting the policies to universal life policies. The transactions can be a boon for both insured and adviser, because they turn a no longer needed term policy with zero cash value into thousands of dollars.
Agents are typically paid for the conversion, and clients will generally receive a majority, if not all of what they paid in premiums over the years for their term policy. Additionally, the target premium is split between the firm and the adviser.
The possibility of a life settlement may also be a favourable outcome given the circumstances that many baby boomers are finding themselves in as they move toward retirement. Key-man policies are an important part of insuring a business, and with many of those key employees retiring and not needing the coverage, advisers can identify significant numbers of such policyholders who could benefit from a settlement.
Even with a relatively limited market of seniors, life settlement companies have paid senior policy owners more than $10bn over the past 10 years, which was $6bn to $7bn more than the cash surrender value of their policies, according to an estimate by industry body, the Life Insurance Settlement Association.
The regulatory issues have intensified, though, with 38 states now having life settlement regulations in place, a significant increase from just a few short years ago.
The life settlement industry has also suffered from its share of misinformation and negative coverage. Life settlements allow producers to offer their older life insurance clients a more profitable solution than surrendering a policy, lapsing coverage, or continuing to hold on to a policy that may no longer suit their current needs. Yet 36% of agents responding to the Agent’s Sales Journal’s 2010 Agent Media Life Settlement Market Study stated they need a better understanding of life settlements.
A life settlement, at its core, involves the sale of a life insurance policy, by its owner, at a fraction of its face value. The policy owner is typically the insured or a trust, and the purchase price is higher than the surrender value, but less than the policy face amount. Upon the completion of a life settlement, all policy rights and obligations are now transferred to the new owner. The final purchaser of the policy becomes responsible for all future premium payments and receives the face amount of the policy upon the death of the insured. Life settlement sales transactions should always utilise an independent escrow company to handle the transfer of ownership and settlement proceeds from the buyer to the seller.
Despite the greater regulatory attention and the sometimes negative attention given life settlement, the future for the product is actually quite bright. The selling point is simple: life settlements actually increase the value of life insurers’ products to seniors, thanks to the policy holder’s option to sell their policy when it no longer fits their needs.
It appears life settlement sales are on the rise again despite being down as much as 60% in 2009 because of the withdrawal of capital from all markets in 2008, according to the Insurance Studies Institute. Now the market is leveling out and signs point towards increased growth.
Current surveys of investors and providers indicate that by the fourth quarter of 2010, agents and brokers who get their business models focused on life settlements now will benefit their clients.
Perhaps most importantly, life settlements are now viewed as full-fledged investments. Investors can buy a life insurance contract at 25% of the death benefit. They pay the premiums until the policy matures and then get the death benefit or full market value.
The greatest remaining obstacle to future growth in life settlements may very well be educational, as nearly half of all producers aren’t involved in life settlements because they don’t understand the concept, according to the Agent’s Sales Journal’s 2010 study. The study also revealed that 50% of agents never even speak about life settlements to clients who are 75 or older.
These statistics are alarming given the fact that, every year, many seniors lapse or surrender policies, but only $8bn to $12bn of an estimated $177bn of eligible death benefit is ever settled. Since life settlements typically yield more than a policy’s cash surrender value, seniors who dispose of their policies without evaluating life settlements could be missing significant opportunities.
Company leaders and trade groups in the life settlement industry predict a return this year of capital and interest in the market that they say is maturing as its state-by-state regulation becomes more complete.
Industry confidence has also been boosted by February’s life settlement trade mission in Europe, in which company and association representatives met with interested investors and tried to educate the potential players on industry movements. The mission – stopping in London, Luxembourg and Zurich – was sponsored by the Life Insurance Settlement Association and the European Life Settlement Association.
Countries including Ireland and Luxembourg that have double-tax treaties with the US are forming new fund structures, and the globalisation of life settlements will provide a huge boost to an emerging industry, which might very well be on the verge of going global.