Are the small face life policies going through the settlement pipeline?
Apparently this is starting.
Take this case. A friend of John Cash was having some financial difficulty with paying the premiums on a $150,000 universal life policy he no longer needed, one with a $13,000 outstanding policy loan.
“My friend was 69 and had some health issues,” says Cash, who is a producer with Cash & Associates, P.A., Orlando, Fla.
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Due to the policy loan, the net value was only $137,000, he continues. The cash value was only $500.
The man had already received notice from the insurance company that he would lose the coverage within 3 to 4 months, if he didn’t add more premium, says Cash. “But he couldn’t keep up with the premiums and the interest on the loan, so he told me he wanted to surrender the policy.”
But when Cash ran it by a settlement broker, he learned his friend might be able to settle the policy instead–even though the face amount was small.
The few other settlements Cash had arranged had involved large face amounts, so the idea of doing small policy settlements was news to him.
The upshot? Institutional investors bought the policy, and Cash’s friend received $5,000 from the transaction.
That $5,000 is more than his friend would have received in a surrender, Cash says. His friend is happy, and the investors will get a good return, he adds. “I think it’s a win-win for everyone.”
Is this the wave of the settlement future? Maybe so, according to settlement experts.
Two or 3 of the settlement providers that Scott Kirby works with now offer small face programs, he says, noting that these are institutional funders.
The policies can have face amounts as low as $100,000, and they may be written on people who are as young as 60 or even younger, says Kirby, who is co-president of Advanced Settlements, Inc., Orlando, Fla.
The upper end of this market might include policies with $500,000 to $750,000 face amounts, says Stuart Hersch, president and chief executive officer of Cantor Life Markets, New York City.
By comparison, Hersch says, traditional life settlements involve large face policies, often starting at $1 million or more. Some buyers in the traditional market will consider policies with lower face amounts, starting at $750,000 or so, he concedes, but the “sweet spot for traditional life settlements has always been face amounts of $2 million to $5 million.”
Typically, in traditional cases, the sellers are age 70 and up.
Such transactions dominated the life settlements market from 2003 to 2007, Hersch recalls.
The problem with traditional settlements, Hersch continues, is that the due diligence is extensive and costly. For instance, the paperwork can run 70 pages or more, covering the policy being sold, the seller, life expectancies, illustrations, and more.
That’s understandable, given the face amounts of the policies being sold, he indicates. But the costs of traditional settlement processing are just too high, where small face policies are concerned.
Kirby, the Florida broker, says that, as a result, it has been hard to find buyers for small face polices. Even as recently as 2 to 3 months ago, he says he had no market for such policies.
But now, says Kirby, he does have markets for smaller-face policies.
What happened, he says, is that some providers have been tweaking their pricing underwriting models so they can accommodate the smaller policies. For instance, some introduced underwriting programs that require little or no medical underwriting, he says.
“The questionnaires require more health and lifestyle questions, and reduced focus on the life expectancy.
“The new questionnaires might run 3 to 4 pages and ask about the seller’s hobbies, travel, marital status, and do on. They do have some medical questions, but they also have the lifestyle questions.”