As financial services markets go, the life settlement industry is just a baby. Created roughly 10 years ago as an outcropping of the viatical industry, life settlements have had their share of negative — and sometimes erroneous — media coverage. Those who support life settlements say they’re an effective planning tool and represent a great option for clients who no longer need their life insurance policies and don’t want to give up the amount of money that surrendering or lapsing would cause them to lose. But for producers who aren’t involved in the settlement process, it’s not always simply a matter of their client base being unable to benefit from this tool. Many admit a clear lack of understanding when it comes to life settlements.
While the life settlement marketplace took some tough knocks this past year with a tighter capital market and an increase in life expectancies, sources such as the Life Insurance Settlement Association (LISA) say life settlements are here to stay. They point to an increase in state regulation of the industry as a sign that life settlements are more recognized and better understood than ever before.
To gauge producers’ experience in and attitudes toward this market, Agent Media, in partnership with LISA, conducted the 5th annual Life Settlement Market Study in late 2009. On the pages that follow, you'll see a market that certainly isn’t shrinking, but which may benefit from better education of producers who may be interested in the transactions, and a general awareness on the part of consumers. Let’s see what the experts — and your colleagues — have to say.
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In December 2009, Agent Media, in partnership with the Life Insurance Settlement Association (LISA), randomly surveyed licensed life producers nationwide. The names were selected from Agent Media’s Life Select Database*. Producers were invited by email to take the survey. The results reflect answers from personal producing agents who have sold at least one life insurance policy in the past 12 months. More than 340 producers completed the survey.
*Editor’s note: Agent Media is the publisher of the Agent’s Sales Journal and the owner of Target Agent Lists, a proprietary database of financial services professionals that includes 1.2 million licensed life, health, and annuity agents, from which the Life Select List was taken. | |
Using life settlements
Fifty-four percent of producers said that they see at least some potential for additional income from life settlements. That points to a general awareness on the part of the majority of professionals that life settlements could be beneficial for their practice — but still, only 32 percent of agents have ever handled a life settlement in their career.
Michael Leibowitz is president and CEO of Invescor, a life settlement back office processing and brokerage services firm — and often, he said, clients simply don’t fit the bill.
“For a life settlement transaction to work, the client has to have a health condition. It’s usually not just a matter of age — it’s a matter of age and health,” Leibowitz said. “If you’re 65 and healthy, there’s nobody in the marketplace who will buy that policy today because you’re going to live longer than the return on investment that they want to earn.”
For Ron Alexander, senior vice president of secondary markets for Crump Life Insurance Services, life settlements do have tremendous potential when applied properly; since they should be entered into only when the policyholder would be surrendering their life insurance policy anyway, the transaction can be more valuable than other available options.
“Where settlements really come in is you can now do a market value and determine the current value of that policy and determine the needs of the client — and for many, those needs have changed,” Alexander said. “Maybe they need more guaranteed income than coverage, or need a little less coverage. A lot of opportunities present themselves when life insurance policies have more value than the cash surrender value.”
And as Doug Head, executive director of LISA, pointed out, an increased emphasis on fiduciary duty may mean trouble for producers who don’t recommend life settlements in appropriate situations.
“I think the first and most important consideration for a producer is if you have the proper relationship with your client, you have to tell them about his options,” Head said.
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Market state & outlook
While 20 percent of producers said their life settlement transactions decreased between 2008 and 2009, Leibowitz said he’s seen more applications come through his firm in the past 12 months.
Overall, Leibowitz believes that as more producers find their way into this marketplace, activity will increase. He doesn’t see a dramatic spike in the near future, but rather a natural growth. And as far as he’s concerned, this type of growth is more appropriate for a market such as life settlements.
“This is still an individual decision for each consumer,” he said. “Annuities are marketed, life insurance is marketed, trusts are being marketed — this is not being marketed. It is being used as a financial planning tool.”
Leibowitz also believes settlements could help drive life insurance sales. Far from being an obstacle, he said, the life settlement market represents an additional option that adds flexibility to the life insurance sale.
“Before, I had cash surrender, death benefit, and a big empty box in the middle that I didn’t understand,” he said. “Now, the life settlement industry fills in the box and shades it so the client can see its depth.”
Unfortunately, said Alexander, the economic environment hasn’t been kind to the life settlement industry. He also said he’s seen more applications coming in — but tighter criteria mean only 1 out of 20 of those applications is qualified.
Despite capital troubles, however, Alexander believes that money will begin slowly loosening up throughout 2010, and the stream of qualified policies should begin finding investors again within the next 12 to 18 months.
Head also pointed out the benefit that more state regulation could have for the settlement industry.
“It took 40 years to get health care reform,” Head said. “We went from the invention of the settlement industry a decade ago to regulation of most of the nation in 10 years. That brings great validity of the asset class to investors.”
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Challenges & Barriers
Despite all the appropriate uses of life settlements and the value its proponents discuss, the market still faces challenges when it comes to the participation of and perception on the part of insurance producers. Seventy-three percent of agents said if they had clients who met the requirements, they would discuss life settlements with them — but even so, only 41 percent of agents expect to work with a life settlement in the next 12 months.
For those who do not anticipate being involved in this market in the near term, the majority said they don’t know enough about life settlements, and 23 percent said they simply can’t because of prohibitions on the part of carriers and broker-dealers.
Comments on the 2010 Life Settlement Market Study do show a lack of understanding on the part of some agents that they may not even be aware of. For instance, one captive agent from Hamden, CT, said, “The major life insurance companies I represent do not approve of life settlements, nor do I. I am not a believer in ‘stranger owned life insurance’.” Yet, life settlements are not the same as stranger-owned life insurance (STOLI), which is prohibited in most states.
And another producer from Shawnee, KS, said, “My primary carrier prohibits such a discussion, and I have always had difficulty with the idea of someone/entity owning a policy where they do not have an insurable interest. Why should an investor be able to gamble on the life/death of an unrelated individual?”
Again, this comment describes STOLI — something separate and apart from a life settlement. While the two are often tied together in media coverage, life settlements are not the same as STOLI — though some STOLI arrangements do involve life settlements.
In terms of carrier and broker-dealer prohibition, Leibowitz said he sees this going by the wayside — and has already begun seeing the companies he works with do an about-face on this issue.
“I would think that’s going to get smaller and smaller as the years go up because it becomes a competitive disadvantage for insurance companies to not allow it when other companies and b-ds do allow it,” he said. “I signed on a b-d this year that allows reps to do life settlements because they found they could not recruit the types of agents they wanted to without doing settlements. [The agents] wouldn’t switch.”
Want more information on overcoming the challenges of offering life settlements — and insight on how to get involved?
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Broker or Provider — Do You Know the Difference?
In the 2010 Life Settlement Market Study, we asked agents what they perceived to be the major advantage of working with a wholesale settlement broker and with a settlement provider. While the No. 1 advantage of working with brokers appears to be the ability to obtain multiple bids to get the policy owner the most competitive price (24 percent), and for working with providers, the ability to deal with a known provider (16 percent), a striking number of producers don’t understand the role each plays — 29 percent for brokers, and 33 percent for providers.
In a nutshell, a wholesale broker will shop policies around to multiple providers — which is why nearly a quarter of agents named this as their primary advantage of working with brokers. While a producer doesn’t necessarily have to go through a broker, there can be plenty of advantages, including the broker’s expertise (23 percent named this as their top advantage of working with brokers), their ability to juggle compliance requirements for a variety of states (6 percent), and, often, their back-office and other support. They will also handle the legwork in gathering a copy of the policy and the policy illustration, the insured’s HIPAA release for the disclosure of medical information and records, and life expectancy reports.
Generally, wholesale brokers have a number of years in the life settlement field, helping them understand the underlying value of a policy and giving them a grasp of major industry players and how to best work with them. Given that the majority of producers in the 2010 Market Study who work with life settlements have completed between two and five in their career (14 percent), brokers can provide a depth of knowledge the average producer may not possess.
So what do providers do? While brokers are part of the sell side of the equation, a provider sits on the buy side and works on behalf of the funder — the entity that will ultimately own the policy once all is said and done. Providers are also known as the purchaser’s agent and work with the funder to determine the value of the policy and the amount of the bid. Providers screen policies to ensure they meet the funder’s criteria and make the bid on the behalf of their clients.
According to Doug Head, the executive director of the Life Insurance Settlement Association, it is essential for producers to recognize the legal role of each party. The provider brings the money to the table but is ultimately negotiating for the lowest price they can get on their side. On the other side of the table, the full-time broker represents the policyholder and the producer and should be working toward the highest possible price.
Generally, said Head, after the policy owner has spoken with a producer to meet any initial life settlement qualifications and discuss the basics, most producers will seek help from a wholesale life settlement broker. While a typical producer is informed about insurance, he said, most recognize that to maximize the value of the transaction, they must seek the expertise and experience of a specialist who is in the market on a regular basis.
“There are some general principles that can be the basis of an objective evaluation of any experienced broker,” Head added. “They include a culture of compliance, extensive due diligence, written agreements covering all the parties, and comprehensive documents covering this information-intensive transaction. While the process of offering a policy for sale can begin with as little as a HIPAA form, a list of doctors, and an illustration to maturity, successfully completing a transaction requires extensive documentation. The more complete the file, the better. Extensive disclosure and written policies for privacy protection of the seller are other key factors.”
