At the recent 21st Annual Spring Life Insurance Settlement Association (LISA) Conference held in Boston, there was one recurring theme: the lack of policy flow into the marketplace. There is now more cash to purchase policies than there are policies to buy. What happened?
From the investment standpoint, there is now more confidence in the life expectancies used to price policies. In addition, there are still few places to invest that can yield anywhere close to the double digit returns that investors project for life settlements. Life settlements, as a mortality-based investment, are largely uncorrelated with the stock and bond markets.
And finally, the regulatory framework is in place to protect the integrity of the business. Therefore, investor demand for policies has grown, which has increased the price that investors are willing to offer for them.
Life settlements should be viewed as an alternative to a policy lapse or surrender, not as an alternative to keeping coverage. With that in mind, here are some interesting statistics regarding lapses:
At the LISA Conference, Bryan Freeman, President of Habersham Funding, reported that 93 percent of all policies lapse without a cash benefit. And 99 percent of all term policies pay no benefit.
A 2010 study of seniors over 65, reported by the Insurance Studies Institute, revealed that 90 percent of seniors who lapsed a policy would have considered a life settlement if they had been aware of the possibility.
A 2012 LIMRA/SOA Persistency Study estimated that from $80 to $112 billion of face amount in policies lapsing that year were on seniors 65 and older.
So large amounts of life insurance are lapsed by seniors each year and yet the life settlement industry wants more policies to invest in? What is wrong with this picture?
Lack of knowledge is the key to the supply problem.