Covid-19’s Possible Effects On The Life Settlement Market

By Shane McGonnell

There are differing schools of thought on how the coronavirus is affecting — and could affect — the life settlement market.

Over the past five years, the life settlement market as an industry has multiplied vastly both in funds to purchase policies and consumer awareness. In fact, a 2019 report from The Deal showed a 28% increase in policies sold in 2018 compared to 2017, while the face amount of life insurance policies sold increased by about $1 billion, to an impressive $3.8 billion.

And in late 2019, Conning reported that the life settlement market would see double-digit CAGR over the next decade. But that was all before the corona virus pandemic.

For consumers contemplating selling their policies, one school of thought is, “Maybe I shouldn’t sell my policy or my parents’ policy right now. What if they contracted Covid-19 and, God forbid, pass away? The death benefit would be greater than what I’d receive from selling the policy.”

That’s an understandable thought process. However, another valid concern that financial professionals are well aware of is, “What if the financial crisis caused by Covid-19 negatively affects the funding for life settlements, exactly like it did after the 2008 financial crisis?”

Life Settlements And Economic Blues

Let’s back up. In 1911, the U.S. Supreme Court ruled that life insurance policies are an asset and can be sold just like any other asset an individual may own, and throughout the years regulations were put in place to strengthen consumer protection.

Pre-2008, the life settlement industry was much like it is now: low internal rate of return from institutional buyers made for high offers for sellers. But, when the mortgage crisis hit in 2008, and the financial markets plummeted, much of the funding for life settlements either went away or went to other opportunities created by the crash.

Looking back 12 years, we can understand what could happen to life settlement offers in an economic downturn. Some policyholders and financial advisors fear that history may repeat itself, and they have every right to be scared.

If history does indeed repeat itself, life settlement companies will have less capital to buy life insurance policies from individuals interested in selling.

This would reverse the current state of supply and demand in the sense that there would be more policies for sale than funds available to purchase them. This, in turn, would drive offer amounts down as we had in 2009, 2010, 2011 and 2012.

To Sell Or Not To Sell

For those on the fence, the time to sell may be sooner rather than later, as life settlement companies are, at least for now, still flush with capital to buy policies.

In the near future, as the Covid-19 fallout continues to affect financial markets, that may not be the case. In fact, what we are hearing from our capital partners is that there very well could be high-yield bail out bond opportunities, as well as a bullish equities market on the other side of this crisis and large amounts of capital could shift to those and other opportunities.

In fact, Treasury Secretary Steven Mnuchin said recently that the current pandemic presents “a great investment opportunity,” referencing the historic lows of the global equity markets.

If that happens, the supply and demand for life settlement cases could shift, which could increase IRRs for the life settlement investment side and would lower life settlement offers to policy sellers.

Policy owners must weigh the unlikely chances of an insured getting the virus vs. something similar to the 2008 financial crisis end result happening again in the life settlement market, which could affect a policyholder’s future ability to sell a life insurance policy.

Currently, life settlement offers are still very strong and considering the Covid-19 issue, policyholders may need money due to recent income or retirement losses and for medical care.

Though there is no crystal ball to predict precisely what will happen, it’s important that sellers understand what could happen in the near future and what has happened before for the life settlement marketplace and why.

As always, it is the financial advisor’s job to educate and provide options so clients can make an informed decision.

Shane McGonnell is executive vice president of Abacus Life, Principal Member of First Financial Resources for over 15 years, 200+ offices Nationwide. Executive Vice President of National Insurance Brokerage, A National Financial Services General Agency, and former VP of Advanced Settlements, A National Life Settlement Wholesaler. McGonnell started in the Financial industry in 1997. With over 22 years experience McGonnell has a heavy focus on Life Settlements and Estate Planning Insurance Advisory.