Life settlements have allowed for the creation of a “market value” that can help consumers make use of the life insurance assets, according to a financial advisor speaking at the Life Insurance Settlement Association’s annual fall conference here.
Barry Kaye, founder of the advisor firm Barry Kaye Associates, said life settlements “allow life insurance to grow up and become a true asset” by creating a place for an actual market value of policies to be established.
By freeing policies from cash values set by insurance companies issuing the policies, he said the secondary market has given “new asset value” to life insurance that can apply in other financial services sectors as well.
“Banks should now assess market value instead of cash value,” he said, adding that doing so would create a greater source of collateral for seniors looking to borrow against their policies.
As an example, Kaye said a policy that he and his wife owned with a cash value of $167,000 was sold on the secondary market for $3.1 million. “For collateral purposes,” he asked, “was that policy worth $167,000 to the bank?”
The emergence and ongoing growth of life settlements and the secondary life market is an important development in the ongoing evolution of life insurance products, Kaye said, and he argued that while regulators should work to ensure that the process is transparent, they should not do so by eliminating consumer choices.
One of the arguments against life settlements, he noted, is that consumers are generally better served by keeping their policies. “If it’s good for the investor, it should be good for the client,” he said. “However, that’s up to the client.” Whether or not to sell an existing policy, he added, is not for an agent to decide “or for the secondary market to decide.”
Consumers interested in life settlements, he said, are typically sophisticated consumers, and many of the steps being taken by life insurers to stem life settlements or investor originated life insurance, such as by asking questions about the applicant’s intent or financing, would in fact have the opposite affect of raising the option in a consumer’s mind.
“All of these questions would trigger a question from any intelligent client as to what those questions are referring to,” Kaye said.
In addition, he also took aim at another argument often made, that consumers are harmed more than helped in settlements due to the high fees and commissions involved. Kaye countered that the benefits to consumers, in a transparent transaction, are clear. “The fact that agents profit from this market does not diminish this benefit for the consumers,” he said.
What that means for insurers, he said, is that they will have to adjust to a world where life settlements are part of the market, and make the changes they need to make in terms of pricing and lapse ratios.
“Why not build life policies that are meant to last and not to lapse,” he said. “Is it really so difficult to change the lapse ratios and accurately price the product?”
Kaye argued that life insurers have mounted their opposition because they failed to make these changes early in the development of the industry, which would have allowed them to dominate the secondary market. Going forward, he said life companies should “stand strong” with the secondary market rather than trying to “kill” it “because they missed the boat and didn’t take over this new industry.”
Another area in which life settlements have been an important development is in the world of charitable giving, Kaye noted, and he himself has donated heavily to Florida Atlantic University. “The life settlement industry and charity go hand in hand,” he said, noting one of the aspects of life policies that also make them attractive to investors, their independence from other market factors. Life policies, he said, maintain a constant value in terms of death benefit. “Real estate and stocks can go up and down,” he said.