One of the trends in the life settlement industry is the auction-style format for selling life insurance policies. When envisioning an auction, we typically imagine a fast-talking cowboy quickly moving cattle through a stockyard or an elegant lady in a little black dress pounding the gavel as she announces a Picasso just set a new record.
Life insurance policies are neither livestock nor Faberge eggs. And I’m convinced that the auction format being proffered by some in the life settlement industry is deeply flawed.
A secondary policy life settlement auction is not a live event with rapid-fire bidding; rather it takes place over several weeks as a broker offers up select information on a life insurance policy. Provider companies are then invited to bid on the policy. The theory is that this artificial, competitive environment will elicit the highest possible price for the policy.
While this may sound like a good idea, there are many reasons why we don’t see auction formats in every type of business. Among them:
Many people who see an auction are looking for a chance to get something cheap. Think about it. Even at a charity auction, which has the friendliest (and often well-lubricated) of audiences, the bidding always starts low. And when you buy at an auction, you are typically most proud of the items you purchased at a bargain price.
Low opening prices exaggerate success. The theoretical purpose of a life settlement auction is to find the true market value of a policy (more on this later), but we often have a close estimate of this before the auction begins. Unfortunately, the auction providers often start bidding very low in order to inflate the spread between the opening price and the final sale price. Ultimately, this exaggerates the success of the auction.
The auction format is not a cure-all. Just a few years ago, auctions were hot. As the internet dawned, a number of companies pioneered online auctions with great fanfare and incredible early success. Times have changed. For example, fewer than 15 percent of all who post EBay listings, are opting for an auction-only sale; and Priceline.com, which built its brand around auction-style selling, just dropped its “Name-Your-Own-Price” tool for booking airline flights.
When a policy is merely put up for auction, all aspects of solution-selling are thrown out the window. Nobody wins. (Photo: Thinkstock)
3 reasons for not doing auctions
Here are 5 reasons why life settlement auctions don’t make sense:
1. Inadequate descriptions at no fault of the policy seller. Life insurance policies offered at auction only give rudimentary information about the policy as these auctioneers try to standardize our industry, which I believe to be largely impossible for secondary transactions. Even if the individual selling the policy provided detailed records to the broker, this information isn’t always offered to the companies participating in the auction.
In addition, the auctioneers control the medical information and provide the shortest life expectancies — enabling them to easily “game” potential buyers. We frequently get blowback from the auctioneers when we ask for additional information.
2. All or nothing sale: leaving no room for solution selling. Not every solution for a client involves selling their life insurance policy. While this may sound sacrilegious, options that are better than an immediate life settlement exist for some clients.
Perhaps it makes more sense for the client to wait or take a closer look at tax implications. When a policy is merely put up for auction, all aspects of solution-selling are thrown out the window. Nobody wins.
3. All or nothing sale: leaving no room for splitting the policy as a retained death benefit sale. One of the most significant innovations in our industry in recent years is a transaction called a retained death benefit.
This option provides relief from rising premium costs while still being able to provide a financial payout to loved ones in the future, albeit not the full death benefit. By selling a portion and keeping a portion, a policyholder gets the best of both worlds.
By selling only a portion of a policy, beneficiaries retain a percentage of the policy death benefit without a future premium obligation. Much like the solution-selling argument, with an auction, a policy seller misses out on the chance to just sell a portion of their policy.
Individual investors (aside from a select group of accredited investors) truly have no place in the industry, writes Wm. Scott Page. (Photo: Thinkstock)
2 more reasons to consider…
4. The seller doesn’t choose the buyer, which could be a huge mistake. In an auction, sellers know little about the buyer of their policy. They rely on the auctioneer, who’s only motivation is to sell the policy. Informed sellers should perform due diligence on buyers, too, which is impossible in the vacuum of an auction.
How is the life settlement provider, which will ultimately purchase and own the policy, capitalized? This is an important question. Today, life settlements are a billion-dollar industry with major institutional funders at the forefront.
If a life settlement provider is cagey about how it is capitalized or appears to be funded by individual “mom and pop” investors, then you are better-off looking elsewhere. Individual investors (aside from a select group of accredited investors) truly have no place in the industry.
Why does this matter if clients get their money? The new owner of the policy will continue to have a relationship with the client after the policy is sold.
The client will be required to periodically contact the servicer or life settlement provider for the remainder of their life, so you want a provider who is capitalized for the long-haul. The auction format precludes this.
5. Too often, the policy isn’t even sold. We have participated in several auctions where no winning bidder is chosen. While this hasn’t occurred with a frequency that prevents provider companies from bidding, it’s a disturbing trend. Some in the industry speculate that some auctions are simply being used as a way to secure a detailed market value — and the seller has no true intention to auction the policy.
While the life settlement industry has become incredibly sophisticated since I started more than 25 years ago, the human being whose life is being insured remains at the center of the transaction. A move toward standardization and volume selling may seem like a natural progression, but I believe otherwise. Every person selling a policy has a unique story and should be treated individually and with great care — not like cattle.
Wm. Scott Page is president and CEO of The Lifeline Program. Read his full bio here.