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.