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. 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.” Since sellers of smaller face policies can be younger people, in their 60s, “some could have 20-year life expectancies,” Kirby explains. Because of that, the underwriters want to know more about what the sellers will be doing with their lives after the transaction is completed. This information helps them make their decisions, about whether and what to offer.
According to Hersch, the impetus for this shift has been a desire among buyers to try to find niches where they can make better buys than their competitors and thus to get better returns on the transactions. One of those niches is the small face policy market, he says. This trend started in 2008, he says, echoing Kirby’s assessment. Hersch estimates that 6 firms have tried to enter this market by running direct-to-consumer programs, but he says he believes that only 1 or 2 of these firms have become marginally successful. “Another 6 or so have attempted to structure underwriting programs, but these are not yet working.” He says he believes “the only way to do this business effectively is to streamline the process and make it more cost efficient…so the insured (seller) can get a good settlement and the buyer can get an attractive return.” That said, he contends the small face market is a good idea for the life settlement business to pursue. In fact, Hersch says “it’s essential, if the life settlement market is to have any legitimacy.
“We need to create value and liquidity for policyowners who have the most need for funds–to pay for medical care, for instance, or mortgages, education, long term care and other expenses.” Approximately 70% of life insurance issued today is in the low face area, by volume, he points out. “Without servicing this market, the settlement business would be creating an elite market.” But serving this market has its drawbacks, he indicates. One is the potential for abuse.
While owners of large face policies–the elite–often have access to good legal counsel, accountants and others to help them make rational economic decisions, Hersch explains, owners of low face amount policies may not be so fortunate. The low-face owners often have “great need, even desperate need,” for the funds a settlement can provide, he continues, but they don’t always have access to advice. This makes it easier for unscrupulous buyers to make offers on a “take it or leave it” basis, Hersch says. That can become a problem if the offers are not the most competitive or in the seller’s best interests. Furthermore, some brokers may just want to churn a lot of policies to make money on the transactions, without having the client’s best interests are heart, he says.
What’s needed to address this is a balance between needs and risks, Hersch says. He thinks a trading system for small face policies, via an exchange, could help move things forward. He says is own firm will open up such a system later this month. It will operate through LexNet, his firm’s institutional electronic life settlement auction.
His firm is also working with a number of financial firms to develop standards for a less costly way to buy small face policies. “The more that small face policies are traded this way, the more you can create a rational market,” Hersch maintains. Would Cash, the agent, assist with settling a small face value policy again? “In a heartbeat,” he says, “if it’s a win-win situation.” He says he won’t do settlements for people on their deathbeds or within a couple years of death. But when the need for money is right now and death will likely be some way off, as with his friend, he says he would consider the option. “It lets the policyholder get more than the value of the (life insurance) asset the owner now has.” “This is a great exit strategy” for people with small face policies they can’t afford or don’t want and who have longer expectancies than the traditional settlement market serves, sums up Kirby.