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Forfeited life insurance benefits pegged at $112 billion

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Americans ages 65 and older forfeit $112 billion in benefits annually by lapsing or surrendering their life insurance policies, according to new research unveiled at the Life Insurance Settlement Association’s (LISA) Fifth Annual Institutional Investor Life Settlement Conference.

John Welcom, founder and chief executive officer of Welcome Funds, and Darwin Bayston, president and chief executive officer of LISA, presented these findings at general session of the gathering. The event was held at event took place on Monday at The Ritz-Carlton New York in Battery Park.

“The potential size of the life settlement market in the U.S. is simply astounding,” said Welcom. “There are tens of thousands of American seniors who are collectively forfeiting billions of dollars in death benefits each year because they lapse or surrender their policies to the insurance companies and, as a result, those policies are terminated.”

A life settlement is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 70 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000.

Welcom provided detailed analysis of the data regarding the potential size of the life settlement market in which he isolated the types of policies that are best-suited for a life settlement.

“Our research indicates there are roughly 250,000 of these policies that are lapsed or surrendered each year, with a combined face value of more than $57 billion,” said Welcom. “Based on the publicly available data regarding the number of closed life settlement transactions last year, we’re currently serving less than 1 percent of this total possible market, so there is tremendous potential growth in the years ahead.”

In yesterday’s presentation, Bayston cited a survey by the Insurance Studies Institute, which found that 90 percent of seniors who previously lapsed or surrendered a life insurance policy said they would consider selling their policy and wished they had known about it when they terminated their policy.

“There are a variety of reasons that a senior may want to explore the life settlement option, such as the life insurance policy is no longer needed or wanted, premium payments have become unaffordable, or various changes in life circumstances such as divorce or sale of a business,” said Bayston. “Our greatest challenge as an industry at this time is to facilitate greater consumer awareness of life settlements so that seniors at least know this option exists and that it may be an attractive alternative to lapsing or surrendering a life insurance policy.”

LISA’s annual gathering for institutional investors brings together executives from pension funds, hedge funds, family offices, foundations and endowments to discuss developments in the secondary and tertiary markets for life insurance. Conference sessions addressed the outlook for the life settlement market, issues investors need to be aware of when considering entrance into the life settlement market, and the opportunities and challenges in developing settlements as a funding solution.

Mark Venn, managing director and chief executive officer of ClearLife, and Gary Brown, chief executive officer of CMG Life Services Inc., led the closing session — “Maximizing Value and Measuring Performance” — that detailed how performance of life settlement investments are measured by returns and how policies are valued.

During the session, Brown shared verified results of CMG’s investment returns from approximately 1,300 policies it has purchased since 2004. As of year-end 2014, 205 matured policies generated an average internal rate of return of 66.04 percent.

More than 40 percent of the registered attendees for this year’s event were from institutional investing firms or financing entities. Speakers from companies such as Imperial Finance & Trading, RiverRock Group, Houlihan Lokey and BroadRiver Asset Management headlined the conference agenda.


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