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November 30, 2008 at 02:00 PM
“Term to perm” has become a new trend in the life settlements market, according to William Scott Page, president and chief executive officer of The Lifeline Program, Atlanta.
In a nutshell, term-to-perm settlements involve settling level term life policies that have been converted to permanent policies (universal life or whole life). Usually, the conversion is done as part of the settlement transaction.
This trend marks a significant expansion of the market, say experts.
Up to recent times, level term policies were not settled, says Page. The institutional and equity markets traditionally require permanent contracts, he says, because of the way the asset is booked and because permanent policies have no potential expiration date. Also, funders need to use permanent insurance for purposes of securitization, he says.
Life expectancy considerations have been a factor, too, Page indicates. To use a level term policy, the term period must be double the life expectancy, he explains. “But most level term contracts run only 10 to 15 years, while most expectancies for settlement cases are 8 years or so. Also, most level term products are not issued to people ages 60-65; they are issued to younger people with longer expectancies,” thus making them unsuitable for traditional settlements.
Now, though, strategies are changing, Page says. Funders are realizing that if a level term policy has a conversion feature, it can be converted to a permanent contract–and then settled.
It is that realization which spawned the budding term-to-permanent settlements market, he says.
It’s not a “rampant” trend right now, says Rob Haynie, managing director of Life Insurance Settlements, Ft. Lauderdale, Fla. But term-to-perm is being mentioned more and more in settlement industry forums and advisors’ meetings, he says. People are realizing that a lot of level term insurance is on the books, much of it involving older convertible policies that are nearing the end of their terms, he says.
Scott Peden, president of Life Partners, Inc., a funder based in Waco, Texas, says his firm saw hardly any of term-to-perm cases before 2007. But this year, he says, “we started seeing these policies presented to us.”
Like Haynie, Peden says term-to-perm settlements do not yet reflect a huge amount of business. “But the business is growing,” he says, noting that the contracts he sees usually involve 10- to 20-year level term policies with large face amounts that are very close to the end of the term and convertible. “The customer is approaching a decision point, whether to keep or convert the policy, terminate or sell.”
Scott Kirby, co-president of Advanced Settlements, Inc., Orlando, Fla., sees a similar pattern: “The contracts tend to be offered just before the end of, say, a 10-year term, and the owner doesn’t need to, can’t afford to, and doesn’t plan to renew it.”
Most insureds in term-to-perm cases are aged 75 to 80, says Peden. By that time in life, it’s too expensive for them to re-enter for, say, another 20-year term. It’s expensive to convert to a permanent contract too, he allows, because permanent policies cost a lot more than term policies. But if the policy is settled, he continues, the cost of the new policy is picked up by the funder as part of the settlement transaction, relieving the seller of that concern.
Advisors should remember that “the cost of the conversion policy is always factored into the funder’s decision of whether to make a settlement offer,” says Peden, cautioning that sometimes the numbers do not favor a transaction.
But even though “the seller has to bear that higher cost in the form of a discount” on the proceeds from the settlement, the seller still ends up with more money than if terminating the contract, Peden adds.
Another advantage for clients is that the underwriting on the original policy carries over to the new conversion policy, says Justin Eriksen, managing director at One Degree, LLC, a Ft. Lauderdale, Fla. premium finance aggregation firm. He works with agents and general agents who do settlements.
