I have recently attended a number of annual meetings and producer educational forums. After revealing that my business focus is on life settlements, I am almost always asked something like, “Life settlements? Are there any buyers for those?”
Of course there are buyers, and they are looking for more robust policy flow. Here are two keys to provide insight into today’s life settlement marketplace.
Wanted: 77-year-old, impaired health
On average, and based on experience, life settlement investors are consistently seeking to purchase policies insuring a 77 year old with a level of impairment that brings life expectancy (LE) underwriting down to the nine year range. This suggests a 77-year-old male, Table D or worse, or a female, Table G or worse. The average policy size is just under $2 million of death benefit. The average has been quite steady over the last year even as additional capital has entered the market, incrementally pushing policy valuations upward.
Keep in mind that averages can be quite deceiving. Buyers generally have reasonably wide ranges for buying criteria to achieve the targeted statistics for a portfolio. This translates to a broad interest in purchasing many different combinations of insured age, impairment levels and policy size. Here are some examples, all receiving multiple bids this year:
- Average age, standard LE, inexpensive policy: 77-year-old male with standard health LE underwriting of 12 years combined with an ultra-low premium of 2.4 percent on a Lincoln $1 million UL policy. High offer: $140,000.
- Elder insured, short LE, expensive policy: 91-year-old, impaired male with a 3-year LE and an expensive premium of 13 percent on a $500,000 John Hancock UL policy. High offer: $115,000.
- Young insured, impaired, average premium expense: 72-year-old male with a 10.5 year LE and a 3.1 percent premium to carry a $2 million AXA UL policy. High offer: $230,000.
- Older insured, standard or slight impairment, average premium expense: 84-year-old female with a 6.5 year LE and a 4 percent premium to carry a $5.1 million Lincoln UL policy. High offer: $1.9 million.
The buyer/investor buy-box is reasonably wide, but specific combinations are necessary for a given policy to find value. Therefore, it is advisable to speak with a life settlement specialist to pre-qualify a policy before formally meeting with the client and completing required paperwork.
Think of life settlements as problem solvers
The most common reason a client considers a life settlement is financial strain. Either the policy premiums have become burdensome or funding is needed for a different priority. It is important to note that clients have different tolerances for financial strain and that needs are measured in a relative fashion. Here is a sample of recent life settlements transacted for financial reasons:
- Cash flow and balance sheet debt relief for a small business loaning the premium to fund a split dollar policy
- Sale of one policy to keep a second policy in good standing
- Creation of liquidity and reduction of monthly cash outflow to avoid putting the house up for sale
- Current nursing home payments
- Pay off an outstanding debt to a former business partner
- Divorce settlement
These days, every life settlement has a story and a purpose behind the transaction. Incorporating life settlements into a financial planning practice provides options to the clients who are facing financial difficulties or changing needs.
Really, life settlements? Yes, life settlements. There is an active market for policies meeting investor criteria. Generally a $500,000 policy or larger, underwritten standard or better on an insured over 70 years old can be considered. Insureds in their 70s must have an impairment to qualify, while those in their 80s can be closer to standard. As demonstrated, the insured age, impairment and policy combinations are vast. Therefore, it is always best to have the opportunity reviewed.
Life’s priorities are ever-changing, as are regulations related to estate planning, general and personal economic conditions and the impact of the financial markets. When considering planning strategies, a life settlement may not be the right solution for every situation, but certainly it is an option that should be presented where suitable.
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