Life insurance should be a liquid asset, just like your house or your car. There is roughly $20 trillion of outstanding U.S. life insurance.
Every year, U.S. policyholders waste over $100 billion as a result of lapsing policies that are unneeded or unaffordable. In fact, roughly 80 percent of all whole life insurance lapses. All of this waste translates into pure profit for the insurance companies.
Consumers need an alternative to lapsing life insurance policies. The future of life insurance is a secondary market, where policyholders can realize the cash value of their policy before maturity.
Today, this exists to a mediocre extent: It’s a small industry called life settlements. As an alternative to lapsing or surrendering a policy, life settlements give policyholders the option to sell their policy for an upfront cash payout, thereby recapturing value and turning an expense into an asset.
Today’s life settlement industry
For all the good that life settlements have to offer, the current process is ugly. The standard life settlement transaction can take months to complete and is full of long applications, repeated document signings, and long wait times.
Life settlement brokers often market their services by explaining how complicated the transaction is, creating a need for themselves to act as guides. It’s not a great experience for either the agent or the policyholder.
The current process is also opaque — designed to enrich middle men. Life settlements are traded ‘over-the-counter’ in private transactions, facilitated by brokers between the policyholder and buyers. A life settlement broker’s transactional fees can cost the seller as much as 30 percent of the life settlement proceeds.
Because the broker system is not very efficient, sellers can miss the best deals because brokers only have relationships with a limited pool of buyers. Some life settlement brokers even solicit the offers that pay themselves most handsomely, not their clients.
This is the golden age of financial services technology. Software is drastically reducing the complexity of our consumer financial experiences. Yet much of the insurance industry has yet to enter the 21st century, and the life settlement industry is the epitome of technological resistance. The life settlement industry is ripe for disruption and technology can help bring efficiency.
I assert that the industry needs a secondary life insurance exchange — a place where all buyers and sellers can come together and seamlessly transact life insurance. An online exchange would bring the following characteristics to the industry:
Simplicity. Selling your life insurance should not be hard. Consumers need a simple online experience where they can enter information into a reliable platform and receive market offers quickly. An online exchange can simplify the process to such an extent that life insurance agents and consumers can easily transact without assistance.
Market liquidity. Sellers deserve to have all qualified buyers consider their policy. Transparent buyer competition allows sellers to realize true market prices.
Faster processing time. Document management, information management, medical records and policy retrieval, and many other facets of the business should be processed by software. Much of the clerical work performed by a life settlement broker can be automated.
Lower transactional costs. An automated exchange can process policies at a much lower cost than the current broker transaction fee. Decreasing this cost is essential to making smaller policies affordable to transact. Life settlements should be a household financial product for the average American policyholder, not a niche product for multi-million dollar policies.
As seniors become more comfortable with financial transactions online, the implementation of an online life insurance exchange will result in both increased efficiency and growth of the overall life settlement industry.