Despite the enormous potential the life settlement market offers, experts are not sure how quickly it will get going. There has been too much confusion and notoriety surrounding these kinds of transactions in past years, says Ron Sussman, CEO of Voorhees, New Jersey-based CPI Companies, a firm that specializes in life insurance and also has a broker/dealer division, and until these are cleared up, he suggests, most B/Ds are going to be reluctant to get involved in the business.
"Life settlement transactions have earned a bad reputation for themselves because there have been too many instances over the past few years of people being forced to buy insurance for the sole purpose of selling it," Sussman says. "Because of this, most broker/dealers don't understand life settlements and don't allow their reps to do them. Insurance companies are doing a better job at policing, but there's a lot of clutter in the market with respect to how life settlements are used. This needs to be cleaned up before we see broker/dealers coming into the market in a big way."
More importantly, though, the future of the life settlement industry depends on whether consumers are willing to accept the fact that life insurance policies can be used for purposes other than what they were originally purchased for. A policy that had meaning a decade ago might not be needed in the same way today, and its owner might have a more pressing need for immediate cash. Being able to sell that policy therefore depends on the existence of a fully functioning, liquid, secondary market. "Whenever you dispose of something in the secondary market, you get a much better cash value for it," says Doug Head, spokesperson for the Orlando-based Life Insurance Settlement Association (LISA). "In New York, you can sell tickets to a great show on the street for more than cash value, and it's the same principle for life insurance, particularly when for the past 50 years, life insurance has been bought and sold as an investment instrument."
Life settlements emanated from the viatical settlements that became a big business at the height of the AIDS epidemic, when terminally ill patients sold their life insurance policies to third parties. The nefarious usage of many of these deals have tainted the industry since that time, but if the life settlement space is properly regulated and if people are willing to see the benefits of a liquid secondary market, there is no reason why the life settlement market cannot take off properly, Head says.
Attorneys like Brian Casey of the big law firm Lord, Bissell and Brook LLP agree. Casey, whose office is in Atlanta, believes the life settlement market is getting ready to take off, and a notice issued by the NASD to its members in August (NASD Notice 06-38) is a clear sign of this, he would argue, even if its focus was the treatment of variable life insurance settlements, which experts say form a very small part of the overall market.
"The NASD is foreshadowing more regulation to come," Casey says, and greater regulation will allow for a more transparent, more efficient secondary market. "With respect to all constituents, a secondary market for financial assets is good, as it creates liquidity and even enhances the value of the insurance product."
