Life Settlements More Popular With Agents And Insureds

After hearing a lecture on life settlements, Michael Rodman decided to put what he had learned to the test. So, he requested bids on a 10-year level-term policy that its owner, a 75-year-old client, was otherwise prepared to exchange for a new 10-year term contract.

Rodman got more than he bargained for. Within two weeks, one offer came back for $960,000. A second institutional funder raised the offer to $1.2 million. By the time the bidding was over, Rodman had nabbed $2.8 million for his client.

“This extraordinary experience really opened my eyes,” says Rodman, a financial planner and president of Advanced Planning Services, San Diego, Calif. “Ive since made life settlements an integral part of my practice.”

The same can be said of a growing number of producers. And that doesnt only mean independent financial planners. A broad spectrum of professionalsfee- and commission-based life insurance agents, certified public accountants, trust officers, lawyers, in addition to full-time settlement brokersare getting into the business.

Indeed, according to internal research from Fort Washington, Pa.-based Coventry First, life insurance agents account for 70% of life (or senior) settlements; full-time settlement brokers generate the balance of transactions. The percentage attributable to agents goes still higherapproximately 96%if one accounts for the fact most of the brokers deals originate with agents.

The various players are riding a burgeoning market. Coventry First pegs aggregate transactions (measured in face amounts or death benefits that changed hands) at between $4 billion and $4.5 billion in 2004. That would constitute a doubling of the approximately $2 billion in transactions for 2002 that Conning Research, Hartford, estimated in a June 2003 study.

The industrys robust growth, observers say, derives in part from its newfound legitimacy. Reputable life settlement companies have distanced themselves successfully from the unscrupulous image and fraud associated with some viatical settlement companies in the 1990s.

Gary Brecka, CEO of Life Asset Group, a Miami Beach, Fla.-based brokerage firm, credits the new transparency in part also to a steady rise in the caliber of the funders. Among them: insurance carriers, broker-dealers, hedge funds and banks that collectively supply billions of dollars in equity to the secondary insurance market.

“Whereas five years ago life settlements was a controversial subject, now its a mainstream transaction,” says Coventry First CEO Alan Buerger. “The perception is that if you, the advisor, are not making clients aware of the opportunity to sell a policy, you carry liability risk.”

Vincent Toscano, a Syosset, N.Y.-based wealth preservation specialist at Sagemark Consulting, agrees. “Were doing a disservice by not understanding the ins and outs of settlements and discussing them intelligently with clients and other advisors,” he says. “The more educated estate planners who work with high-net-worth clients are bringing this option to the table.”

The industrys improved image has led to a relaxing of regulatory controls. In July 2004, the National Association of Insurance Commissioners, Kansas City, Mo., adopted a provision in the NAIC Viatical Settlements Model Regulation that allows states to rescind any dual licensure requirement for life and viatical settlements.

During the past 18 months, most states have passed legislation that either doesnt require a separate license or that says the advisor need only be licensed to sell life insurance to qualify for a life settlement license.

Apart from broadening the definition of viatical settlement to include any sale of a life insurance policy for less than its face value, Subsection 3.H. of the current model also includes new protections against fraud. The provision lets states address the security side of a transaction (sale to investors) in the insurance department if a legislature deems it appropriate.

Experts additionally credit education initiatives for the increased willingness among life insurance agents to incorporate senior settlements into their practices. Coventry Firsts nonprofit arm, Coventry Center for Financial Professionals, runs a nationwide continuing education program that some 20,000 financial professions have leveraged. The American College, Bryn Mawr, Pa., also includes viatical and life settlements in its Chartered Life Underwriter program.

To be sure, formal education is no requirement for gaining entry into the market or to be successful. Both Toscano and Rodman note theyre entirely self-taught. Cleves Delp, a financial consultant and president of the Delp Company, Maumee, Ohio, says his 15 years of experience underwriting policiesassessing risk to an insurance carrier based on the prospective insureds age and medical conditionproved to be invaluable training.

What skills are key? Topping the list, observers say, is an understanding of the pros and cons of a senior settlement. Advisors note that most life insurance policies under consideration for sale should be retained because of the tax advantages and estate liquidity benefits.

But in a minority of cases, a settlement may make sense where the client no longer has an insurable interest or no longer wants to pay premiums and is considering allowing the policy to lapse. The client also may desire to exchange the policy for a limited paid-up policy or one with an irrevocable beneficiary. If the proposed settlement concerns a permanent life insurance policy, the clients ability to secure more than the cash surrender value will guide the decision.

In still other instances, the tax advantages that prompted the policy purchase are no longer present because of legislative revisions. Thats true, Delp notes, of the formerly popular equity split-dollar plans businesses offered as an executive benefit.

Ultimately, the decision to sell will hinge on an appraisal of the policys market worth. In making this determination, the settlement company will consider the insureds age and medical condition. The closer the insured is to life expectancy, the sooner the settlement company can collect on the death benefit; and, hence, the higher will be the net present value of the policy, taking into account such factors as inflation.

The settlement providers will also weigh, in addition to the size of the face amount, outstanding premiums that remain to be paid, policy performance, and riders that might boost the policys market value. (Example: the premium refund option, which lets beneficiaries collect not only the face amount but also premiums paid.)

“Nothing is more attractive to settlement companies than this rider,” says Delp. “They know theyre going to make money when they buy the policy because every dollar they put in increases the death benefit. They just dont know how big the return will be.”

Nor, to be sure, what theyll have to pay to purchase the policy. The market value, experts stress, will hinge only partly on the settlement providers valuation. To ensure the highest price for the client, producers counsel soliciting competitive bids from two or more settlement companies. And, they add, the agent should be prepared to do some hard bargaining.

“One has to negotiate,” says Toscano. “The funder may offer $120,000 to buy a policy. But if I think its worth more, I might negotiate for 5 months to drive the price up to $200,000.”

Savvy producers, experts say, do an in-house appraisal before placing a policy on the secondary market to ascertain what it might fetch. To that end, Rodman developed some custom valuation tools. And Delp leverages an independent firm that specializes in this area.

Valuation in hand, agents then need to design an illustration to best position the policy for bidders. They also need to do due diligence on prospective settlement companies to ensure theyre dealing with a reputable firm. The industrys improved image notwithstanding, advisors warn the field still harbors suspect players.

“I tell clients that I only work with institutional buyers,” says Delp. “I dont engage small investor groups who buy policies and then hope the insured will die, or outfits that might want to resell the policy to some unsavory character.”

All of the due diligence requires time and money. Rodman says he spends about $1,000 to review and prep a policy. Among the expenses: orders for medical records and policy illustrations, plus travel and administration costs. The effort, he adds, will result in a sale 8% to 12% of the time; in the balance of cases, he advises the client to keep the policy.

But when a sale makes sense, and a satisfactory price can be negotiated, the producer can expect to be amply repaid. Producers say commissions generally are calculated as a percentage of the face amount and, less frequently, as a percentage of the sale price. In some cases, the compensation may be fixed using both formulas (e.g., the lesser of 2% of the face amount or 10% of the sale price).

The mechanics of the deal might also prompt an agent to forgo compensation. Advisors say it may be necessary, for example, to waive the commission on a settlement to get the client to buy a new policy or agree to a financial plan that comes with a fee.

With or without a commission, say producers, the ability to offer clients a settlement as part of a portfolio of planning vehicles only can enhance ones practice and help distinguish the agent from other financial professionals.

“If youre going to compete at the very highest levels of the sophisticated life insurance marketplace, then it is incumbent upon you to have senior settlements as a component in your strategic arsenal,” says Delp.


Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.