Turning the Tables

One such maverick is Larry Fondren of Legacy Funding Group in Malvern, Pennsylvania. In financial services since 1973, Fondren has made a career out of identifying inefficiencies in financial markets (that not coincidentally often seem to favor the big institutions) from bond offerings to the Internet, and coming up with ways for smaller players and individuals to level the playing field. He has even testified before Congress about the need for more transparency and equal access to real-time pricing and financial information in U.S. markets, and “the adverse impact of these upon consumers.”

Fondren’s latest mission is to provide alternatives to the current life settlement approach for consumers who want or need to liquidate their assets in life insurance policies. To understand the advantages of his solution, you first need to know the current situation in the life settlement industry. Back in the ’90s, one of the old life insurance pioneers told me that the whole insurance industry was changing because risks had changed: people had become far more likely to outlive their assets than to die early, and now needed life benefits more than death benefits. Life settlements have become one of the solutions to that problem.

Life settlements grew out of the viatical settlements, which became popular in the mid-80s, in part due to the need of terminal AIDs patients for access to the death benefit to pay for medical treatment as their illness ran its course. As that industry developed, it became clear that policyholders had needs for their insurance assets that went far beyond medical treatment. As insureds got older, so did their beneficiaries, who often became more successful as well, and didn’t need a large death benefit anymore. At the same time, elderly insureds on fixed budgets often find high insurance premiums to be a burden.

Life settlements let you access your death benefit before you die, but at a price. And because it was a buyers’ market–people usually needed the money and had few alternatives–that price was, and is, high. For a $5 million policy on a 70-year-old man, a life settlement offer might be $1 million. That’s more than the $500,000 surrender value, but not a big chunk of the death benefit. In addition life settlement offers tend to be low because they are actually buying the policy from the insured. That means not only does the new owner have to keep making the premium payments, but the longer the insured lives, the more they have to pay, so they significantly discount the purchase price to cover the longevity risk. (I don’t know about you, but personally, I’m a little squeamish about someone else having a substantial financial interest in my dying sooner rather than later.)

After studying the life settlement industry, Fondren saw the inherent flaw in this conflict of interest, and realized that everyone would be better off if they each had a vested interest in the insured living as long as possible. His solution is Legacy Funding, which is based on the simple premise of lending money to insureds secured by a portion of their death benefit, rather than buying the policies. Because insureds are borrowing against their policies, they continue to own them, pay the premiums, and still leave some of the death benefit to their beneficiaries. But they can also get up to 90% of their death benefit in cash, today. (Insurance companies, of course, also lend money against their policies, but on the cash value, which is usually much smaller than the death benefit.)

Fondren charges a guaranteed 9% on the amount borrowed (which accrues until the death of the insured), and only loans against policies that have been in force for at least two years. To secure the loan, he takes a lien against the death benefit, which is paid off at the time of death. His revenues, then, come from the interest paid on the loan, which means the longer the insured lives, the more he makes–a textbook win/win.

For the insureds, who might possibly be your clients, the advantages of this solution are pretty obvious. They not only get more cash out of their policies, but have greater options to restructure their finances: they can increase their current cash flow by borrowing just enough to pay up their premiums, or they can use the proceeds to meet pressing needs of their beneficiaries now, rather than have them wait for the death benefit, or they could reinvest the proceeds in a potentially more lucrative venture, or they can just take the money to improve their current lifestyle.

Providing a tool that’s better than the current alternatives for advisors to solve some client issues clearly falls in the “good idea” category, but for me, it’s even more comforting that there are folks like Larry Fondren out there, making a living by trying to level the playing field between financial consumers (your clients) and the big institutions. Not so different, in my mind anyway, from independent financial advisors themselves.