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.
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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.