What You Need to Know
- The stock market and the bond market have been volatile this year.
- Investors are looking for investments that move separately from traditional investment markets.
- Life settlement companies create alts.
Recent market volatility, high inflation, and overall economic dynamics are increasing the anxiety levels for financial advisors and clients at or near retirement.
While many wealth managers agree that market conditions in the foreseeable future are unlikely to produce the attractive returns their clients experienced over the past ten years, there may be a silver lining for seniors age 65+ who are thinking of selling their unwanted life insurance policies.
The good news is that a volatile stock market coupled with high inflation tends to drive greater interest in the alternative investment asset class.
This is due to the asset class’s attractive yield and its low correlation to the movement in the traditional markets.
The secondary market for life insurance (life settlements) is included within this alternative asset class.
As new sources of alternative investment capital flow into the market, the purchasing offers from institutional buyers become more competitive.
This “supply and demand” trading environment benefits policy sellers by maximizing the value of unwanted policies.
And, it benefits the client’s licensed agent who may earn compensation on the transaction.
Alternative Investments: A rising tide lifts all boats
Broker-dealers sold a record $10.5 billion in alternative investments (“alts”) during the month of January 2022, according to a press release issued in February 2022 by Stanger Investment Banking.
The investment bank also noted that the spike in the sale of alternative investments in early 2022 is a harbinger of what’s to come and projected $120 billion in sales this year.
In addition to the life settlement market, the alternative asset class is comprised of investments in sectors such as commodities, real estate, insurance products, foreign currency and other investments.
According to a previous ThinkAdvisor article authored by an institutional investor in the life settlement space, the secondary market for life insurance is attractive to investors “because it’s capable of delivering high single- to low double-digit annual returns.”
Regardless of what’s driving the “alts” trend, a rising tide lifts all boats.
As investors in life settlements up their game, this may be the time for agents and their senior clients to maximize the value of unwanted policies.
How can agents and seniors benefit from the rise in ‘alts’?
As increased amounts of investment capital enter the secondary market for life insurance, institutional buyers are forced to compete for the limited supply of policies available for purchase.
Due to market forces driven by supply and demand, policy buyers may be forced to broaden their purchasing guidelines in order to meet their policy acquisition goals.
Unlike five years ago, we are now seeing offers on policies for insureds with longer life expectancies, offers on policies with smaller face value, and generous pay-outs on convertible term policies.
Based on an analysis of the transactions we’ve brokered over the past twelve months, we’re seeing purchasing offers range as high as 75% of the face value for UL policies, to offers on convertible term policies as high as 20% of policy face value.
Here’s an example: We recently brokered a transaction that illustrates how younger seniors with expiring term policies can receive a cash windfall from a “term conversion life settlement.” The case also demonstrates how a licensed agent can benefit by receiving a commission on the sale of the UL policy.