Feature: What to expect as life settlements become more established

Life settlements are becoming a more established part of the financial services landscape, according to two experts commenting during a recent conference call with UBS analyst Andrew Kligerman. But those looking to bring financed policies to the secondary market should expect to encounter more questions up front and, perhaps, a lower sale price, they indicate. Life settlements have risen dramatically over the past few years, points out Larry Simon, the chief executive officer of Life Settlement Solutions, San Diego. He says the increase between 2006 and 2007 was an estimated 25%. There are a number of reasons for this, he says. Most importantly, more and more individuals are entering the higher age brackets where life settlements become a potentially appropriate option. Secondly, those working with, or for, those individuals are becoming increasingly aware of the secondary market, he adds. "There's a lot more education going on," for the insurance agents, lawyers and financial advisors, as well as their clients, he adds, noting that more of those financial services workers, "are aware of the product and are starting to sell settlements and talk to their clients about it." Additionally, Simon notes that broker-dealers are "now realizing there is a fiduciary responsibility" to clients that includes discussing settlements. "More and more of them are allowing their sales people to talk to the clients about settlements." The relationship between advisor or agent and client is an important one, and one that is contributing to the growth of settlements, says Debra Hoag, president of Ogilvie Security Advisors and Gentry Partners, based in Chicago and Boston. "Many times we're seeing a client and the trustees and the children and anyone involved," she says. "This is going to continue because these producers have had these lifelong relationships with these clients who are now entering the 70s and the 80s and are out every year analyzing their policies." Hoag notes that clients are increasingly looking at settlements in lieu of 1035 exchanges, and that seniors who have sold a business they owned in order to retire are increasingly converting their term policies into universal life policies for sale on the secondary market. But clients themselves, particularly high net worth individuals, are also becoming more aware of the nature of life insurance as an asset, says Hoag. "They're just so much smarter these days, and more sophisticated," she says, noting attitudes have changed regarding policies. People see them as more as an asset, she indicates, and the negative connotation of selling a policy has waned over the past few years. Many clients just want to be aware of what their policy is worth even if they don't necessarily intend on selling it, she says. "Just like when I buy my home, I might not want to resell it, but at least I want to make sure. Do I want to buy a home that will at least hold its value? Of course I do." However, both Simon and Hoag say that policies paid for through premium financing can expect a tougher time on the market. Inventory of such policies has built up among providers, they say, and buyers are taking a more discerning approach. "We're seeing so many policies from so many different premium finance programs come out into the marketplace," Hoag says. There are some buyers who will still purchase financed policies, she adds, "but they are buying these policies on a discounted basis. They're doing lots of due diligence–which is what one would expect the company to do in buying the policies–to make sure that the policies were issued correctly up front and that there are no issues that could end up being a liability for the new buyer down the road." From a settlement provider perspective, the issue is that a potential buyer will want to ensure that the policy will pass any insurable interest litmus tests in the future, Simon notes. "It's very, very important in evaluating the premium financed paper to make sure you know the history of the program and make sure you know that there is insurable interest," he says, adding that it's important to know that the questions asked by the carrier when the policy was initially sold were answered correctly. "When we buy these policies, we have to make sure that the questions were in fact answered appropriately." He's asking for more, too, such as the reasons that they took out the policies. Premium financing isn't going away, Hoag points out. Carriers did adopt a more cautious stance throughout 2007, she says, explaining "they want to know why the client just can't write a check." But many are still accepting financing programs, she says, and such programs have become important, as even high net worth clients may not have the liquid assets to cover their premiums in the current economic climate. "They are absolutely still continuing to take certain premium finance programs, legitimate premium financing programs. There's a need out there for that," she continues. "We're particularly seeing that when the stock market gets hit so (hard), we have a lot of high net worth clients who obviously have the assets, but because their assets are possibly in the stock market, they're looking to do premium finance deals at low interest rates rather than taking out their assets at a loss in the markets." Some types of premium finance arrangements were at the center of one of the major regulatory debates between the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. The NAIC model in this area would impose a 5-year ban from the initial policy issue date on some settlements while the NCOIL model would impose a 2-year ban. Although different states are working to adopt one or the other of the models, or even some other version, Simon says he believes the 5-year ban is less likely to withstand a legal challenge should it be enacted. With the life policies increasingly being viewed as an asset, he said, such prohibitions would be similar to telling investors that the stock they just purchased cannot be sold for 5 years, regardless of the changes to its value. Concerning "the person who needs to make it through the downturn in the stock market," or who is invested in real estate, Simon says: "I don't think they should have to wait." Should such a ban be enacted, he predicts that it would be swiftly called into question. "There are a lot of people who would challenge that, including consumer rights groups."