You could say life settlements–the mechanism through which people sell their unneeded life insurance policies to third parties–present a good-news, bad-news scenario. It appears the good news is outweighing the bad. And that’s particularly good news for you.
But first, the bad news: Life settlements’ reputation has taken some hits from life insurers that have left some bruises. Christopher Kampa, director of research and project development at Insurance Studies Institute, a non-profit think tank on insurance-based risk management, says insurers see life settlements as a threat to their profits, so they’ve gone on the offensive.
“It’s easy for detractors to paint life settlements as a ghoulish investment, primarily because investors receive a death benefit when the insured dies,” Kampa says.
And he says insurers are working to align legitimate life settlements with stranger-originated life insurance (STOLI). While a life settlement is a legal sale of a life insurance policy, STOLI involves a third party who persuades someone to take out a life insurance policy just to sell it.
“The life settlement industry is strongly opposed to this type of transaction,” Kampa says.
Some good news
Despite the attacks, Kampa and other experts say there’s plenty of good news. Not only for policy holders and financial advisors but even for the insurance companies themselves.
Michael Leibowitz, president and CEO of Invescor, a life settlement brokerage services company in Farmington Hills, Mich., says life settlements could increase the sales of life insurance and that life settlements represent an additional option that adds flexibility to the life insurance sale.
Kampa adds that life settlements actually increase the value of life insurers’ products to seniors. “This value is derived from a senior’s option to sell their policy when it no longer fits their needs,” he says.
And at a fundamental level, Kampa believes life settlements are as legitimate as any other investments and that they share many of the same economics as pension funds, life insurers, annuity writers or long term care providers.
Plus, it appears life settlement sales are on the rise again despite being down as much as 60 percent in 2009 because of the withdrawal of capital from all markets in 2008, according to the Insurance Studies Institute. “Now the market is leveling out and signs point towards increased growth,” Kampa says. “Current surveys of investors and providers indicate that by the fourth quarter of 2010, agents and brokers who get their business models focused on [life settlements] now will benefit their clients.”
What’s more, life settlements are now investments. Jeffrey Madden, with AGAP Life Offerings LLC, a resale funding entity for life settlements in Plano, Tex., says they offer attractive gains without volatility. Investors can buy a life insurance contract at 25 percent of the death benefit. They pay the premiums until the policy matures and then get the death benefit or full market value.
Getting the word out
So if life settlements offer so many benefits, why aren’t there more of them? In a phrase, lack of awareness and understanding. “Agents and advisors don’t have a strong understanding or awareness of the life settlement option,” Leibowitz says.
- First, experts say advisors should understand the demographics of those who might be a good fit for life settlements. Leibowitz says it’s often those 65 years and older who have had a change in health from the time when their life insurance policy was issued and where the death benefit is at least $250,000.
So the ideal candidate has a policy that’s no longer needed. Perhaps they’ve lost a loved one, maybe they’ve dissolved an estate or business venture, gone through a divorce or suffered financial hardship that can make keeping a current policy undesirable.
- Second, know that the viability of any life settlement mainly depends on the age and health of the insured, the type of policy, the insured’s gender, life expectancy, policy face amount, carrier rating, accumulation value, outstanding loan value and cash surrender value of the policy.
- And third, it helps to know the key players: wholesale settlement brokers (on the
selling side) who shop policies to providers and can bring multiple bids to the table for a
better price. Providers (on the buying side) work for the funder, who will own the policy, to decide the policy’s value and the bid amount.
Incidentally, your clients may not know about life settlements either. Kampa cites a recent survey that found less than half of seniors realize they can cash in on their policies.
Selling life settlements
When it comes to discussing life settlements with clients, realize that because they may not have heard about them they may be skeptical. “Fear of the unknown heavily influences the consumer decision-making process, and in this instance, seniors’ fear of loss often overrides the opportunity for gain.”
So consider sharing real-life examples of seniors who’ve gone the settlement route. If you can get their testimonials, all the better. Another tip, Kampa says, is to focus less on how much a life settlement might return versus the cash surrender value and more on how a settlement serves as an alternative option.
“The greatest perceived value to a senior isn’t the amount of money they can get from selling their policy, but the flexibility of having more options than those dictated by the insurer,” he says.
Kampa encourages agents and brokers to thoroughly understand life settlements so they can guide clients through the process. “Agents and brokers need to encourage seniors to objectively compare life settlements with other options that may meet their objectives.”
Another tip: discuss what clients can do with their settlements. Kampa says the most common use of life settlement proceeds is buying related products: annuities, long term care coverage or life insurance underwritten at a more competitive price. “This allows agents and brokers to maintain a relationship with the insured and earn even more commissions off the sale of a policy,” Kampa says.
The key, experts say, is when you understand the history (both the good and the bad) along with all the benefits and details of life settlements, it could be good for wealth.