New products entering the secondary life market are not likely to be highly competitive with life settlements, some executives in the industry believe.
The products, known as policy value loans and synthetic life settlements, have so far not made much of an impression on Nik Volkov, chief financial officer of Milestone Providers, LLC, Wayne, Pa. “The margin is not necessarily there for investors,” he says of them.
The products are distinct from life settlements in a number of ways, although they have the same objective–offering investors a profitable return while giving policy owners a way to raise cash.
In a new report, the Insurance Studies Institute, Keystone, Colo., defines policy value loans as permanent loans that use a life insurance policy’s death benefit as security, thereby giving the owner some of the policy’s market value while keeping the policy and securing some of the death benefit for beneficiaries.
The other product, synthetic life settlement contracts, can take 2 forms, ISI notes in its report, “Secondary Market of Life Insurance And Related Insurer Challenges Entering 2009.” In one form, an individual notional contract is based on a pool of monitored lives. In the other form, the contract is designed and priced to imitate a life insurance policy.
In its report, ISI calls policy value loans “a unique product, much different in structure and purpose than conventional cash-value loans and accelerated death benefit loans,” which are provisions that insurers write into their policies as part of the terms of sale for cash-value life policies.
Examples of policy value loans are New York Life’s “Access Plus,” which NYL offers as a type of accelerated benefit to its own policyholders who are seriously ill, are at least age 65, and have owned a NYL policy with a face value of at least $250,000 for at least 2 years. The company has offered Access Plus since 2006, notes ISI.
Another example is “Legacy Loan,” which Legacy Funding Inc. says it plans to role out in the first quarter of this year. The product will be tailor-made for specific policy holders and investors and will not mandate that the owner be terminally ill, according to ISI.
Synthetic life settlements, the other new secondary market product, are not really life insurance but are rather financial contracts tied to someone’s’ actual life expectancy, or in another variation, on a group of lives. The contract issuer collects premiums from the contract holder and pays a benefit upon the individual’s death, explains ISI.
Such contracts are offered by very large banks, says Nik Volkov of Milestone Providers. They “sound like a good way to hedge certain exposures, but from what I hear, the return is marginal and fees are very high,” he says. “The margin is not necessarily there for the investor.”
Speaking on synthetic life settlements, Larry Simon, president and chief executive officer of Life Settlement Solutions Inc., San Diego, also says he is not very impressed.
“I would much rather buy the actual policy or 10 policies, because having the actual asset is better,” Simon says.
With these products, the investors rely on the credit rating of the bank, because what one is buying is not an actual policy with underlying assets, he notes.
“What happens if you buy from an AA [credit rating] bank that in 10 years becomes a BB bank?” he asks. “If I own an actual policy, I can see everything that’s going on, I can watch the credit rating of the carrier, and then I can sell the asset if I want.”
Simon predicts that for that reason, synthetic products will not be as marketable as life settlements. “The negatives far outweigh the positive, in my opinion,” he says.
“I don’t want a derivative product,” he concludes. “In today’s market, I want to touch and feel the asset.”