Life Settlements

Good Reasons for Agents to Cash in On the Life Settlements Boom
by Mark B. Leeds, MBA

I ndependent insurance brokers can cash in on the continuing life settlements boom once they have the right information and incentives. In addition to outstanding financial rewards, there is a strong case for a social responsibility with their senior clients and a relatively brief and simple process to convey to prospects.
Fees are in the five-figure category for a one-time transaction. In addition, the senior may use part of the lump sum to purchase some other insurance policy, such as long-term care. The typical settlement is for policies with face values of over $750,000 for a client 70 or older, according to financial advisor, Robert Asselstine of P&T Financial in San Carlos, Calif. The usual minimum for an agent or broker is 3% of the face value, which would be $22,500 in that case. Life settlements had a volume of $6.1 billion in 2006 despite being far from a mature financial area, according to Conning Research.
Brian D. Pardo, head of Life Partners Inc. of Waco, Texas turns the table on insurers that claim that life settlements lack social responsibility. He asks which is more responsible -- promoting the lapsing of a policy and paying out paltry surrender values or providing a liquid secondary market that offers three to four times the surrender value and eliminates the need to pay costly premiums for a product that is no longer needed or wanted?
In one context of social responsibility, governments have a stake in life settlements, which generate product revenues to fuel the economy and state and federal tax revenues. The senior’s net is taxable. A 2007 study by the Life Insurance Settlement Association (LISA) revealed that the average gain above surrender value per settled policy was approximately $250,000. Fees to brokers, agents, and providers are taxable. Interest earned by the policies’ new institutional owners are taxable. In contrast, a lapsed policy does not produce such tax revenues. Charities also benefit from the settlement of donated life insurance policies.
Further reinforcing the responsibility of the life settlement industry is the fact that a majority of the states regulate life settlements and the Financial Industry Regulatory Authority (FINRA) has jurisdiction over securitized policies.
In addition to the mainstream life insurance policies, other underperforming policies qualify, such as key man insurance that is no longer needed or insurance that was originally obtained for mortgage protection for a house that is now paid off.

The $1.1 Trillion Lapse Story

How big is the potential market? The untapped market includes more than 90% of the insured people who are eligible for settlements -- a population that is growing as people live longer and more people become affluent.
Two years ago, the American Council of Life Insurers Fact Book estimated over $13 trillion in life insurance policy face values were in force. Life insurance carriers reduced their exposure by $1.1 trillion in 2005 due to policy lapsing, according to the Insurance Information Institute. Nearly 20 million policies lapsed that year, while about 3.5 million policies matured. Individual, credit life, and certificate holder policies --resulted in death benefit payments.
More than 60% of people 65 and over let their policies lapse, chiefly due to ignorance, difficulty paying premiums, and the absence of alternative advice from brokers and other financial professionals, says Phil Wasserman of Phillip Roy Financial Services, in Sarasota, Fla.

The Settlement Process

The life settlement process is not terribly complex or time consuming. In addition to understanding their fiduciary responsibility, a broker or agent should have a working knowledge of how settlements operate. The agent must give a client the information they need to consider a settlement; sometimes shop the policy to settlement providers, depending on the client’s wishes; and give some rather routine guidance as the process unfolds over a period of several months. Establishing relationships with several reputable provider firms is a straightforward procedure. In most cases, these firms arrange the settlements for third-party funding sources, said Pardo.
Brokers are encouraged to use The Life Insurance Settlement Association (LISA) as a resource, particularly for recommendations about getting full disclosure, obtaining a number of bids in writing, and making sure a provider is licensed to do business in the particular state in question and meets its pertinent regulations. Brokers can contact Doug Head of The Life Insurance Settlement Association (LISA) to get a list of providers that are members. (www.lisassociation.org) LISA has also established compliance and anti-fraud guidelines.

How Does It Work?

The prospective senior settler is an affluent, financially sophisticated person who has been paying about $35,000 a year in premiums for a $1 million life insurance policy in force for at least two years. The policies are often whole life, but other types can be settled including term insurance.
P&T Financial described a case of a 72-year old woman who had a $1.5 million face value universal life policy containing a $200,000 surrender value. The policy was sold for $500,000. Life Partners described the case of a 70-year old man who sold his company five years earlier, but was retained as a consultant for a five-year “earn-out” period. The arrangement included a $1 million key man policy, which would be assigned to him at the end of the five years. Since he already had adequate insurance coverage, he sold the key man policy for a tidy sum.
Here is an outline of the process, step-by-step:

Step 1: A senior (or a younger person with a life-threatening illness) is advised of the life settlement option by a CPA or other financial advisor who will guide the client through the steps. Some seniors learn about settlements on their own.

Step 2: One or more settlement provider firms is contacted and an application is sent to the insured.

Step 3: The application gives the provider data about age, health, type, and value of the life insurance policy, and quality rating of the carrier by A.M. Best. The senior authorizes the provider to collect and evaluate medical records and insurance information. A physical examination is rarely required.

Step 4: The information is reviewed and evaluated. If a potential settlement appears viable, its suitability for funding goes forward to matching purchasers.

Step 5: An offer (bid) to buy the policy is made. If no bid is forthcoming, another provider may be contacted.

Step 6: If the offer is accepted, the closing part of the process ensues. It involves document-signing, notification of the insurance carrier, and money placed in escrow for the sake of all parties.

Step 7: Change of ownership to the buying fund or party is implemented and the money is released to the settler.

The entire process usually takes two and a half to five months. The buying party becomes the new owner of the policy. On occasion, the new owner is the provider company rather than a funding institution. It pays future premiums due and collects the full death benefit when the originally insured person dies.
––––––––––
Mark B. Leeds, (bizcommark@aol.com) a business and investment writer, works with financial professionals in the advisory, insurance, Providers, accounting, and consulting fields. He has written for Barron’s, Money, Retirement Weekly, and other publications, and, has testified before national insurance organizations and State insurance committees.