By Cyril Tuohy
Rewind to 1994, the year the Life Insurance Settlement Association (LISA) was born.
It was the year Orange County, Calif., filed for bankruptcy following disastrous derivatives trades. The Dow Jones closed out the year on Dec. 30, 1994, at 3,843.44, and the U.S. government’s budget deficit was $203.2 billion.
The leading edge of the baby boom generation was more than a decade away from retirement, millions of workers still relied on a corporate defined benefit pension and funding long-term care barely made it on any legislative agenda.
Big public pension programs like Social Security and the Disability Trust Fund were squarely in the black, projected to run into deficit sometime “into the next century.”
LISA, meanwhile, was just getting started. Compared to older, established life insurance associations in existence for more than 50 years, LISA was a veritable newborn.
LISA, though, was different. Unlike other life insurance trade organization dedicated to convincing the marketplace why life insurance is worth buying, LISA’s reason for being is to remind policyholders of a certain age that their life insurance policy has value, and is worth selling if it is no longer needed.
The organization took its first steps with viatical settlements, when HIV cut short life expectancies of patients. Thousands of policyholders realized they were better off selling the policy for a sum between the cash value and the death benefit.
As treatment improved, demand for viatical settlements waned as HIV patients lived longer. LISA began to focus on retirees and older Americans.
They, too, were living longer and it was only a matter of time before their needs would have to be met, said Darwin Bayston, president and chief executive officer of LISA, which celebrated its 20th anniversary earlier this month at the annual conference.
With more than 40 million Americans over the age of 75, those policyholders hold between $700 billion and $800 billion worth of life insurance, Bayston said. And those numbers will only grow, according to U.S. Census Bureau projections.
Of the more than 40 million Americans age 75 or older, 20 percent hold policies that are eligible for settlement, Bayston said, which means the settlement market is now worth more than $100 billion — not bad for a 20-year-old.
For a 10-year period ending in 2022, the average annual amount of life settlements will be $2.2 billion, and the estimated annual growth for face value settled will increase 1 percent to 2 percent per year until 2022, Conning estimates.
Bayston said policyholders and their advisors need to give as much attention to a life settlement than they do any piece of valuable personal property — a car, a silverware collection, jewelry or a rare first-edition masterpiece.
“It’s an asset that needs to be included in their portfolio of assets and part of their financial plan,” he said in an interview with InsuranceNewsNet.
For senior citizens who have reached a point where they no longer need their insurance policies, they and their advisors need to be aware of their options before the policies lapse. Insurance carriers often prefer to have a life policy lapse since it voids any future claim.
But if LISA doesn’t bring these issues to the attention of the advisor or the policyholder, then who will?
Looking back 20 years, there’s no question that LISA helped create a secondary market for policies that policyholders forgot about, or that advisors simply overlooked. The secondary market, Bayston said, is a place where people can find out if their policy still has value and if it does, “whether they want to sell it or do something else with it.”
LISA’s most significant legislative victory is its push for the adoption of life settlement regulation, now law in 42 states and Puerto Rico, where life settlements have waiting periods of between two and five years before the policy can be sold.
In four other states -- New Mexico, Michigan, Delaware and Massachusetts, where viatical settlements only are regulated -- LISA has won a partial victory.
Only Wyoming, South Dakota, Missouri, Alabama and South Carolina don’t regulate life settlements.
“We’re still finding ourselves,” Bayston said. “It’s the first inning in a nine-inning game.”
LISA’s next few innings may take the place on the ball fields of long-term care, where the opportunity to fund long-term care needs will grow.
With the number of Americans 85 or older growing 30 percent in the 10-year period ending in 2010, the long-term care market offers the life settlement industry with a way to attract new capital, according to a report last year by Conning.
Meeting the financial needs of nursing home patients and helping elderly Americans either remain in an assisted living facility or stay longer in their home with home health care represent new frontiers for the life settlement industry, the report said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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