Can baby boomers put their not wanted/needed life policies up for sale in the life settlement marketplace?
Some settlement professionals have been looking into this and it appears that, in a few select cases, older boomers might be candidates for these transactions.
That would be boomers in their late 50s and early 60s, provided they have “significant” health issues that clearly shorten their life expectancy, says Gary Edelston, an advisor with GE Insurance Services, a Minneapolis agency.
The life expectancy issue is important, he stresses. Without that, “we have no market for boomers,” he says.
It is a narrow niche market, confirms Michael Coben, senior vice president at Coventry, a Ft. Washington, Pa. firm specializing in the secondary life insurance market. “There are few providers interested in older boomers, ages 56-60 … and I only know of one (settlement) firm that is interested.”
Coben says his own firm will look at policies of boomers age 60-65, but only in select situations–say someone whose health has declined since the policy was issued, and whose life expectancy is under 20 years.
Edelston’s firm did handle one life settlement for someone in his early 60s. That was for a person who not only did not want or need the policy, but who also had a short life expectancy, Edelston recalls. The life expectancy was beyond 2 years, but was not equal to that for a same-aged person in good health, he says.
Such cases are very rare, Edelston continues. “We did this one younger-age settlement out of 100s and 100s of life settlement transactions.”
Why the rarity? Traditional funders look for policyowners age 65 and up, preferably age 70 and up, because of the shorter life expectancy naturally associated with those age brackets, explain Edelston and Coben.
What they are after is life expectancies of 2 to 18-20 years, adds Michael Leibowitz, chief executive officer of Invescor, Ltd., a Farmington Hills, Mich. firm that processes settlement trades for large broker-dealers.
In the case of boomers, even older boomers, many are still very active and have life expectancies of over 20 years, he continues. “It’s hard to find a buyer” for their policies.
Why? Investors don’t want to hold policies for up to 35 years before they collect the death benefit, he says.
If the boomer is not in good health, “that does change the situation,” Leibowitz allows.
However, even here, selling the policy is not automatic, Leibowitz stresses. “Say the policyowner has diabetes, is overweight and is not complying with medical management for the condition. Such a boomer may not be able to find a buyer, because the boomer can later decide to lose weight or manage the diabetes,” he says.
On the other hand, if a boomer has a very serious condition that is not terminal but that definitely alters life expectancy, a buyer might be found. Examples of qualifying conditions could include certain cancers, progressive diseases or serious heart conditions, he says.
Is there a rule of thumb? “The closer the boomer is to age 55, the harder it is to settle the policy–due to the expectancy issue,” Leibowitz says.
That said, Leibowitz doesn’t expect the settlement market boundaries to stay fixed as they are today.
“As the market matures, age parameters will expand,” he predicts. “Ten years ago, investors were looking for expectancies of 2-8 years. But then institutional investors entered the market and the expectancies expanded, to 2-20 years today.
“Institutional investors are looking at settlements as a portfolio, for return on investment purposes. Since there is not that much risk to these investments, they have been willing to buy longer expectancies to balance out the portfolio.
“But, the longer the expectancies, the lower the ROI will be. So there will be a point where investors will find alternative investments that have more attractive ROI than with life settlements.”
Leibowitz predicts the maximum expectancies will top off at 22 -25 years.
Still, many boomers do call to inquire about settlements, Edelston notes.
In most cases, those calls are about settling policies for their parents, he says. “They ask about selling policies the parent doesn’t need any more–say, a policy the parent bought many years ago as an inheritance for the kids” who are now grown.
This part of the market makes a lot more sense than settlements for boomers’ own policies, Edelston contends.
“We get calls from boomers from all over–Hawaii, Hungary, Panama, and so on. Our response is to be sure the callers are as educated as possible about life settlements. And we tell them up front, what we can and can’t accomplish for them.”
But some boomers do call about their own policies, or they inquire about settling their own policies after first discussing their parents’ policies, Edelston adds. In most of these cases, “we tell them, ‘a market is not available for that. We don’t have a buyer for this policy,” he says.
The exception would be, as indicated earlier, a boomer with serious health problems.
Most consumers are still “very unaware” of options outside of surrendering or lapsing their unwanted or no-longer-needed policies, observes Coben.
That applies to boomers, too, he says.
“But as they become aware, the boomers are intrigued–because life settlements are about gaining control, looking at your policy as an asset you can control.”
This is especially so if they have had a financial or medical change in their life and need to cut back or need to get cheaper coverage, Coben says.
That fits in with the predisposition that many boomers are said to have, of wanting to (or having to) take control of their financial lives and futures, he indicates.
As the settlement market matures, more boomers, and the public in general, will understand the applications for settlements, Coben predicts. But for that to happen, he says the industry needs to focus on educating consumers, and not just financial advisors, about settlements.
This education should be directed toward the public in general, not necessarily boomers, he adds. “That way, it will drift down to the boomers.”
Coben sees the word spreading this way: “The top of the front edge of the boomers will find it appealing, when they learn about it. Then, a few years later, if they need to make a change in their life insurance, they will already be informed about it.”
Knowing they can settle their policies later on makes life insurance more valuable to them right now, he adds. “They know they can buy it in their mid-50s and then, down the road, the insurance will have residual value beyond the surrender value. It’s an exit strategy for them.”
Advisors need to be honest up front with boomers who are interested in life settlements, Edelston cautions. They need to know that the market for them is very slim right now. And, most importantly, they need to know that settlements are for policies that the owners no longer want or need.
When they ask, he says he usually inquires if they have other ways to meet their liquidity need. For instance, if the life expectancy is under 2 years, he may ask: “Do you have an accelerated death benefit in this policy?”
Usually, he finds that it is not in the boomer’s best interest to sell a policy for a fraction of the ultimate death proceeds–which would happen on settlements where longer life expectancies exist.
So, he educates the client on available options. He pursues a settlement only if it proves to be the best possible option.