The New Face Of Life Settlements

By Cyril Tuohy

At first blush, there was little to celebrate over the latest data on life settlement transactions.

As reported in The Deal, the number of settlement transactions in 2014 tumbled 38 percent to 847 transactions representing $1.65 billion in face value. This compared with 1,356 transactions in 2013 with a face amount valued at $2.57 billion.

Yet nearly every life settlement executive interviewed by The Deal indicated the industry was busier last year than it was in 2013.

Strip out the huge drop in life settlement transactions booked last year by Coventry First, the market leader, and there was much to be optimistic about.

Life settlement experts said they’ve noticed more transactions among policies with smaller face values as the industry matures and regulators build legal structures around the sale of life insurance policies the seniors no longer need.

As the market for life settlement develops, it is beginning to expand into life policies with smaller face values, Michael Freedman, president of GWG Holdings in Minneapolis, told InsuranceNewsNet.

He said better technology and more efficient processes of both brokers and providers have enabled companies to acquire policies more efficiently and aggregate a portfolio containing more policies with smaller face values.

He added that more capital from institutional and private sources has begun to enter the market. This has helped life settlement companies expand their ability to originate small and midsize face policies to an extent that had not been able to achieve previously.

“The exclusive focus for the last decade of the life settlement market has been on large face life insurance policies, but as this market emerges and expands it will naturally reach toward smaller face policies,” Freedman said.

Reaching out, either through direct-to-consumer channels or through the traditional broker-advisor channel, is “a huge positive for the industry,” he said.

Recent bills passed or pending in state legislatures have brought more attention to selling a life policy for people who need to qualify for Medicaid.

“Seniors have to be aware of the options available to them if they find their policies are no longer needed or no longer affordable,” said Darwin Bayston, president of the Life Insurance Settlement Association in Orlando.

Indeed, many policyholders and financial advisors aren’t familiar with how life settlement contracts work. In many states, insurance carriers are not required to tell people who own life insurance policies that they have options to sell their policy before the coverage lapses.

A lapsed life insurance policy returns to the insurance carrier, which then doesn’t have to pay the death benefit.

In the settlement of a life insurance policy, the policyholder “settles” or sells their life insurance contract by signing over the policy to a buyer who continues to pay the premium but collects a portion of the death benefit.

The price the buyer pays falls somewhere between the cash value built up in the policy and the death benefit. A whole life policy with $10,000 in cash value and a $50,000 death benefit may sell for $12,000 or $15,000, for example.

Life insurance policyholders will settle an insurance policy if the policy no longer meets their needs, or if they own more than one life insurance policy, for instance.

Bayston said that since it doesn’t take any more time to process a smaller policy than it does a large one, life settlement companies are adjusting their business models to accommodate policies with smaller face values typically held by the mass affluent who may need the income to pay for long-term care or other medical expenses.

“Overall it’s a very good thing and I think it’s a trend that will continue,” he said.

Research by Conning & Co. estimates that over the 10-year period from 2013 to 2022, the average annual amount of life settlements will reach $2.2 billion with the annual growth for face value settled increasing by about 1 percent to 2 percent a year.

The research, titled “Life Settlements: A New Opportunity for Smaller Policies,” found that as baby boomers look for ways to pay for long-term care, nursing home care and assisted living, settling life policy contracts will become more attractive to many seniors.

Conning said that under Medicaid rules, policyholders with cash value life insurance policies worth more than about $2,000 need to liquidate the policy and apply the proceeds toward long-term care costs before qualifying for Medicaid.

With the sale of traditional long-term care insurance falling, there’s an opportunity for life settlement providers to broaden their market and provide consumers with a funding source for long-term care through the purchase of cash value policies, the report said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.