Are Life Settlements Back?

It’s been a while since I’ve discussed life settlements but, then again, it’s been a while since there has been a lot of activity in the market. The market wasn’t dead; it just seemed that way.

As a reminder, the life settlement industry is a secondary market for existing life insurance policies and it is an outgrowth of the vatical market. A viatical settlement is the sale to a third party of a life insurance policy on the life of a terminally ill individual, defined as someone with less than a 24 month life expectancy. Fundamentally, a life settlement is the sale of a life insurance policy to the secondary market on the life of an individual who isn’t terminally ill.

This market has lovers and haters, that’s for sure. The proximity to viaticals is enough to make some skittish. Some people were on the investment side of viatical and life settlements and didn’t do well. Some think the idea of a third party owning a life insurance policy on your life is creepy. (Though they may be shocked to understand just how long a list it is of entities which have a vested financial interest in their early demise, but the others somehow get a pass.) Some are indoctrinated by life insurance companies that settlements are terrible and never in the best interest of the consumer.

I’ve been involved with bringing life settlements to the table as both an exit strategy for unwanted or underperforming policies as well as a funding strategy for new policies since the nineties, well before most people ever even heard of the concept. The reason I have always been involved is because I am in the business of bringing value. To this day, I’ll consider a properly executed life settlement one of the most powerful tools a life insurance consumer has access to for their own financial and planning purposes. This concept has single handedly broken the monopsony the life insurance market has had over the relinquishment of life insurance policies. Without a settlement market, there was no reasonable yardstick of fair market value. To be sure, as long as there has been cash value in policies, there has been a settlement market but the insurance carriers have exclusively controlled it. Personally, I think they are upset because someone else is trespassing on their profitable territory. Generally, no one likes competition but competition is almost always good for clients and anyone stating otherwise likely has ulterior motives.

Of course the life insurance industry hates it. If we’re considering an individual in his or her seventies or eighties and the cash value of the policy is a fraction of the death benefit and the individual sells the policy rather than cashes it out, the buyer will keep the policy in force until death and the policy will be substantively less profitable to the carrier. I don’t blame them for fighting the concept but if you saw what goes on behind the scenes as I do, you might be more than a little disgusted. The hypocrisy is appalling.

This market is all about bringing consumers information they need to make decisions. It is about identifying potential value. What if a term policy with no cash value has a market value of 10% of its death benefit? If someone has a $1,000,000 policy who is about to let it lapse for no value or surrender it for, say, $50,000 and it is worth a quarter million in the market, possibly tax free, how could it be justifiable to not bring the opportunity to the table? In fact, I strongly feel there is meaningful liability to not do so.

The market was a bit wild and crazy ten years ago with some sketchy things going on. However, while the marketing and strategies may have been freewheeling, the value of the basic concept was never in question. As always, it’s about working with the right people.

After the market crash and along with some changes in the life expectancy tables, the market, relatively speaking, went dormant. Today it is clearly making a comeback and I am bringing polices to the market which I would have never even made a phone call on not long ago.

The classic cases come primarily in two flavors. First, there are a plethora of underperforming and underfunded policies in irrevocable trusts for estate tax planning where these policies have fundamentally no hope of ever paying a death benefit, though many of these people still don’t understand this. Salvaging and maximizing value from otherwise worthless or marginally valuable assets is almost always attractive. The other flavor involves (still convertible) term insurance policies on older individuals who have no idea these policies could be worth something meaningful. They could be at the end of their level term period or funding a buy-sell or key man agreement which is no longer in place. Maybe the business owner is selling or the bank loan the policy has been backing is paid off.

Charitable planning is the focus of a few cases I am working on right now. No matter what the potential use of money, why throw anything away without determining value first? The unassailable point is to understand the market and to get your arms around the parameters of viable contracts. It is also to have a resource on speed dial for when a client situation comes across your desk and you need to reach out for quick answers. It never hurts to ask and if there is no down-side to your client to explore opportunities, I can’t fathom why not. If I could share some of my stories, you’d see what I mean. Six figures for a term policy with no cash value? Seven figures over cash value for a crashing universal life policy? This is the definition of value and is certainly not something you want your client to discover after he let his policy fall off the books for nothing.

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