The economic downturn has significantly reduced the values of both investment portfolios and real estate. Unfortunately for many seniors, retirement income and estate values have followed. As a result, this is an ideal time to review your senior clients’ life insurance and determine if the needs for which it was originally purchased still exist.
Following are four steps to help build awareness among consumers about the opportunity presented by the life settlement market in today’s economy.
#1: Define your approach
One of the first decisions you need to make is whether life settlements will be a reactive or proactive part of your practice. If reactive, you will simply wait for opportunities to present themselves. If proactive, you need to determine who to target and how to identify opportunities.
In today’s market, ideal candidates are over 70 years old and possess a universal life policy with a death benefit between $500,000 and $10 million, a minimum annual premium to maturity less than 5 percent of the death benefit, and a cash surrender value less than 25 percent of the death benefit.
Also important is demonstrable “health arbitrage” that either was present at issuance because of overly generous underwriting or has resulted from a decline in your client’s health. Other criteria may qualify a policy to trade, but these characterize the majority of cases that are selling.
Now that you know the types of clients and policies to target, you need to identify opportunities. Every Section 1035 exchange, lapse, or surrender that you process is a great place to start. A more proactive next step would be to conduct insurance “portfolio” reviews for clients or prospects who may qualify. Trading a policy could be recommended whenever any of three insurance re-allocation strategies are appropriate for a senior client:
- Improve insurance – In this case, a client would sell a policy to fund a term conversion or to buy a replacement policy that enhances coverage or lowers premium.
- Increase income – A client would sell a policy and buy an annuity or simply use the sale proceeds to supplement retirement income; this strategy could also be used in lieu of long term care or disability insurance, or to fund a charitable gift.
- Improve investment – Clients would sell a policy (often key-person or corporate or charity-owned) to fund an alternative investment offering better or more immediate returns.
#2: Identify your solution
Whether you decide to approach this on your own or partner with a broker, you should ensure that you:
- Have a standardized, consistent process that you can communicate to clients.
- Offer a solution that is compliant with the laws in the states where your clients reside.
- Use actuarial-based pricing software to value policies before you market them.
- Market your clients’ policies to multiple institutional funding sources.
- Have transparency to all offers and fees.
- Can rapidly scale your solution to meet increased client demand.
- Have certified errors and omissions coverage for the transaction.
#3: Promote your product line
Once you establish your solution for trading policies, it’s important that you make your clients and prospects aware of it. An email blast or a postcard mailing is a simple way to get the word out. To ensure success, however, you should integrate traded policies into your practice’s marketing plan so that clients believe this is an area in which you’re proficient. Try:
- Promotion via Web site, email content and footers, on-hold messaging, or a dedicated section in newsletters
- Product line listing on business cards, fax cover sheets, and agency stationary.
- Inclusion in seminar marketing, both as the focused and secondary topics.
As you contemplate new marketing campaigns for trading policies and ways to respond to client interest, you should explore the resources of your industry partners.
Most firms offer frequently asked questions, case studies, and other educational material that will help your clients understand your solutions.
#4: Manage expectations
Once clients are aware and accepting of your traded policy solution, some will choose to use it. Understanding the transaction process and setting realistic expectations is often the primary difference between great and awful client experiences. The multi-buyer, traded policy process is similar to that of an impaired risk case and typically takes four to six months from identifying the opportunity to receiving compensation.
Major process steps and milestones include:
- Qualifying the case and estimating the policy’s market value.
- Completing informal inquiry paperwork with your client.
- Developing the case file with medical records, life expectancy reports, and policy information.
- Marketing the case to multiple institutional buyers.
- Receiving quotes and selecting a buyer.
- Completing the buyer’s formal application (i.e., closing documents) with your client.
- Responding to buyer underwriting requirements.
- Receiving buyer approval and notification that funds have moved into escrow.
- Awaiting ownership transfer by the carrier.
- Receiving client proceeds.
- Awaiting client rescission period (in regulated states).
- Receiving compensation.
If you lock in your approach, develop a comprehensive solution, promote your capability, and manage expectations, you’ll be marketing a competent life settlement product line to your clients and be on your way to creating a successful new revenue stream for your business.
Ronald C. Alexander is the senior vice president of life settlements for Crump Life Insurance Services. He can be reached at ron.alexander@crump.com.