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.
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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.
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By GlobalData
Favourable outcome
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.
Significant opportunities
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.
