Three years ago I was asked to write about life settlements in a "down" economy -- and while I certainly never expected to be writing about the same issue three years hence, the economic downturn is not all bad for the life settlement industry. In fact, our recent recession can mean good things for financial professionals involved in bringing life insurance and life settlements to their clients.
The new settlement market
One of the benefits is obvious: Consumers ranging from aging Baby Boomers to their parents may seek alternative financial options to alleviate anxieties about liquidity. That is, those who had not previously embraced life settlements may now be motivated to learn about them because other assets have dwindled and the recession has dragged on.
Of course, part of the reason for this is simply in the numbers. Most life policies are purchased to protect loved ones or assets, but almost 85 percent of those policies never pay out, according to recent data from the Insurance Studies Institute. Consumers long accepted those uneven terms, until the life settlement market gave them an option. The recession gives them even more incentive to create cash from an asset they may have considered illiquid.
Trends in investing
In all fairness, there has been a decline in settlement offer amounts, but that's not solely due to economic conditions. Since the recession began there have been substantial changes in mortality underwriting unrelated to the changing economy. In other words, the way life expectancies are calculated, specifically as they relate to settlements, has changed.
On the flip side, a challenging economy means institutional and qualified investors are bringing money into the secondary market for life insurance as they look for non-correlated investment vehicles -- investments not tied to the market. Hedge funds and other major investors have pulled money out of the mortgage market in favor of investing in life settlements. This is important to consumers and the financial professionals who help them because it means there is money to buy policies at a time when more folks need to sell policies.
A selling tool (or two)
Let's revisit life expectancy recalibration for a moment. In life settlement transactions, life expectancy projections are a major factor in pricing. In early fourth quarter 2008, one of the major life expectancy underwriters announced it was raising all "L.E." projections by 20-30 percent. Three other L.E. houses announced soon after that they would follow suit, raising their own projections.
These changes in life expectancy projection knowledge and philosophy have simply come with the industry's cumulative experience, and it means that the methods to value policies have evolved over time. And, in truth, this valuation knowledge base has become an important selling tool for financial professionals. Whereas life insurance used to be pretty much an all-or-nothing proposition -- the policy "matured" upon your death or you let it lapse -- advisors now look to the life settlement market to help policyholders better value life insurance.
It is believed that most, if not all, of the few remaining states that do not regulate the sale of policies into the secondary market will soon do so. This is a good thing. The very fact that life settlements are highly regulated provides comfort for consumers and investors alike. And if consumers are more confident in the option, the advisors who assist them win, especially at a time when consumer confidence in financial businesses is flagging.
One last economic selling point for you: Life settlements generate cash independent of credit history; in other words, you don't have to "qualify" to sell an asset you already own -- at least not in terms of your credit score or ability to repay. That may make settlements more appealing at a time when policy owners are facing unprecedented economic challenges and when loans are harder to obtain.
So, keep an eye open for your clients who need the life settlement option (those who have policies near lapsing may be a good place to start looking). These days, we're all talking about the economy; that's a good natural conversation starter with existing clients and even prospects.
M. Bryan Freeman is president and managing member of Habersham Funding, LLC, a life settlement provider in Atlanta. He can be reached at firstname.lastname@example.org.