The Future of Life Settlements

Depending on whom you talk to, life settlements are either a superior alternative for seniors who are considering lapsing their insurance policy, or the bane of insurance carriers and an environment rife with scams, involving nefarious individuals, smoke and mirrors, and ponzi schemes. The truth is that the life insurance policy settlement market is an industry struggling with its identity and its history, presenting itself as a form of alternative investment, allowing investors to diversify their portfolio and enabling policyholders to sell their life insurance policies for significantly more than the cash surrender value that a carrier might remit to the owner upon policy surrender.

Historically, the life settlements markets have been perceived as a viable albeit risky investment strategy mostly for institutional investors. To overcome risk of the insured’s longevity on any single policy, large quantities of policies must be pooled together into portfolios. This requires significant capital deployments to purchase and carry these policies to maturity and removes the asset class from of consideration for all but the high net worth investor and institutional banks and hedge funds. There have been efforts to commoditize the asset class through securitizations and bond offerings to bring the asset class to the common investor, but these have not been enormously effective to date. However, success stories do exist, whereupon life insurance policy portfolios and hedge funds have seen 12 to 15 percent returns after fees, even during these tough economic times.

The industry does have unresolved issues. Some of the top concerns are whether life insurance settlements should be treated as securities. There is ongoing debate over federal versus state regulation of the trade. Additionally, sensational headlines have confused potential clients as new articles published recant indictments of individuals who sought funds from investors under the guise of portfolio investments and outsized returns only to support their own outlandish lifestyles.

All these negatives aside, life settlements are fundamentally perceived to be less volatile than their traditional financial market counterparts provided they are coupled with expert guidance. The life settlement market took hold in the late 1990s when viatical settlements became a sound option for AIDS patients and other terminally ill policyholders. Since that time, the industry has grown from under $1 billion to to over $10 billion by 2007. Conservative estimates predict the market will exceed $160 billion over the next several years. While the market did experience a decline in volume – $8 billion in face value transacted during 2009 according to Conning research – experts are calling it an expected correction that was largely attributed to the recession. Also, life settlement investments largely avoided the peaks and valleys of the major market indexes in 2008 and 2009, demonstrating strong, consistent performance that outperformed the S&P and most exchange traded funds.

Are They Securities?

The US Government Accountability Office released a report in July 2010 that confirmed what those in the life settlement industry already knew – life settlements deliver on average eight times more to the policy sellers than carriers can offer in surrender payouts. The Life Insurance Settlements Association notes on their website that the industry creates 7 million dollars per day in value for seniors who opt for a life settlement.

Efforts have been made by the Securities and Exchange Commission to approve life insurance policy securitizations in an attempt to bring more protection to the investment community by placing the investment class under FINRA jurisdiction while also opening the investment class to retail investors. This has largely been opposed by the ACLI, citing increased risk of fraud to create product via stranger-originated life insurance policies.

Insurer Opposition

Insurers have been trying to curtail growth of the life settlements industry. Many have implemented language in contracts with agents prohibiting them from discussing life settlement options with their customers. However, according to the Life Insurance Settlement Association (LISA), over 90 percent of all life insurance policies written lapse with no payout to the beneficiaries of the policy. The settling of those policies means more payouts for insurers. Actual data from 1995 to 2008 indicates that $9.2 trillion out of $20.9 trillion, or 45% of all insurance policies sold were lapsed. During that same time period, a mere $38 billion, or 0.3% of life insurance policies were settled. This data in effect refutes any claims by carriers that the settlements industry represents a significant threat to the insurance industry.

Some carriers have attempted prohibition of settlements, effectively tying the hands of brokers and agents and inhibiting their ability to discuss the settlements as an option with customers. It puts brokers in a difficult position – comply with insurer requirements and risk losing the business or comply with state guidelines and face possible legal action from the client. Many brokers are opting to fulfill their fiduciary responsibilities, and take their chances with the insurer community. And some states are now requiring that brokers and agents inform their clients of the existence and option of the life settlement market.

Federal Government vs. State Regulation

Despite insurance carrier opposition, the federal government is considering seriously the feasibility of the life settlement market. At the moment, life settlements are regulated in 40 states and Puerto Rico. The 2010 Financial Reform Law continues the current state-based regulatory system and adds a Federal Insurance Office, a monitoring body overseeing the insurance industry. The office is charged with evaluating state insurance law for inconsistencies and conducting a cost/benefit analysis of possible federal regulation.
Also created by the law is the Office of Financial Protection for Older Americans, designed to locate unfair or deceptive financial advisor certifications. Life settlement industry experts point to this office as the next source of regulation and standards development for the industry.

With increasing attention by the federal government, the life settlement industry is gaining a strong foothold in the investment community. Most states are adopting both life settlement regulations and banning STOLI (stranger-originated life insurance) practices – buying insurance with the intent to resell it on the life settlement market – and brokers will be required to understand the market and advise customers on life settlements as one credible option.

Also, the National Conference of Insurance Legislators (NCOIL) is supporting regulations that require insurers to inform their policyholders of all options available to them, including life settlements. A number of US and European associations are joining forces to bring more transparency, consistency, and investment decision-making tools to consumers.

The life settlement market welcomes the additional transparency. The industry has operated well under current conditions, but additional regulatory oversight can go a long way toward reassuring brokers and clients of the strength of their investment advice and decisions. In 2007, NCOIL adopted its Life Settlement Model Act, a 28-page document outlining proposed rules and standard practices from licensing requirements and disclosure to fraud prevention and penalties. LISA officials and membership approved the Act, and many life settlement brokers and companies have implemented the plan.

In an environment of financial upheaval, the settlement industry continues to make significant inroads. While the life settlements markets have indeed slowed over the past two years, they have demonstrated continued vibrancy, and market interest is growing. Internal rates of return on portfolios have been increasing, which has shown increased expertise in their construction and management and will generate renewed investor interest. New stress tests indicate insurance carriers are strong enough to withstand the existence of the life settlement marketplace and continued efforts towards regulating the industry will improve. The insurance broker community can no longer ignore the potential for customers. As standards and codes of conduct are developed and implemented, policy sellers and potential investors will be seeking expert guidance in navigating this new territory. Life insurance professionals should take a proactive approach to life settlements in order to create more value for their clients. Industry organization websites such as http://thevoiceoftheindustry.com are a great first step for those looking to learn and connect with accredited professionals.

Located in Manhattan Beach, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)