Policy Buyers Up Their Game

Recent market volatility, high inflation, and overall economic dynamics are increasing the anxiety levels for financial advisors and clients at or near retirement.

While many wealth managers agree that market conditions in the foreseeable future are unlikely to produce the attractive returns their clients experienced over the past ten years, there may be a silver lining for seniors age 65+ who are thinking of selling their unwanted life insurance policies.

The good news is that a volatile stock market coupled with high inflation tends to drive greater interest in the alternative investment asset class.

This is due to the asset class's attractive yield and its low correlation to the movement in the traditional markets.

The secondary market for life insurance (life settlements) is included within this alternative asset class.

As new sources of alternative investment capital flow into the market, the purchasing offers from institutional buyers become more competitive.

This "supply and demand" trading environment benefits policy sellers by maximizing the value of unwanted policies.

And, it benefits the client's licensed agent who may earn compensation on the transaction.

Alternative Investments: A rising tide lifts all boats

Broker-dealers sold a record $10.5 billion in alternative investments ("alts") during the month of January 2022, according to a press release issued in February 2022 by Stanger Investment Banking.

The investment bank also noted that the spike in the sale of alternative investments in early 2022 is a harbinger of what's to come and projected $120 billion in sales this year.

In addition to the life settlement market, the alternative asset class is comprised of investments in sectors such as commodities, real estate, insurance products, foreign currency and other investments.

According to a previous ThinkAdvisor article authored by an institutional investor in the life settlement space, the secondary market for life insurance is attractive to investors "because it's capable of delivering high single- to low double-digit annual returns."

Regardless of what's driving the "alts" trend, a rising tide lifts all boats.

As investors in life settlements up their game, this may be the time for agents and their senior clients to maximize the value of unwanted policies.

How can agents and seniors benefit from the rise in 'alts'?

As increased amounts of investment capital enter the secondary market for life insurance, institutional buyers are forced to compete for the limited supply of policies available for purchase.

Due to market forces driven by supply and demand, policy buyers may be forced to broaden their purchasing guidelines in order to meet their policy acquisition goals.

Unlike five years ago, we are now seeing offers on policies for insureds with longer life expectancies, offers on policies with smaller face value, and generous pay-outs on convertible term policies.

Based on an analysis of the transactions we've brokered over the past twelve months, we're seeing purchasing offers range as high as 75% of the face value for UL policies, to offers on convertible term policies as high as 20% of policy face value.

Here's an example: We recently brokered a transaction that illustrates how younger seniors with expiring term policies can receive a cash windfall from a "term conversion life settlement." The case also demonstrates how a licensed agent can benefit by receiving a commission on the sale of the UL policy.

The insured in this case involved a life-licensed CFP who owned a $2.8 million term policy nearing expiration.

As a registered advisor whose practice included senior clients, he was mindful of his fiduciary responsibility to inform older clients of the life settlement option when it was in their best interests.

Given the situation with his own policy, the advisor recognized an opportunity to boost his fiduciary competence through the learning experience of selling his own policy.

In spite of his young age of 65, we were able to negotiate several competitive offers from buyers that resulted in a $30,000 cash windfall for his term policy, and a broker's commission of $60,000 for the term-conversion to a UL policy.

In short, policy sellers stand to benefit from increased investor interest in the life settlement market that enables buyers to extend more attractive offers on a broader range of policies, including policies for younger insured seniors.

Not only does the seller receive a cash pay-out far beyond the policy's cash surrender, but they effectively shift an unwanted expense to the income column.

And in the case of term policies that are about to expire, it's clearly a cash windfall.

Licensed agents and financial advisors who represent the client do the heavy lifting as it relates to case preparation and working with the life settlement broker to facilitate the sale.

In return, they may earn broker's compensation on the life settlement transaction as well as a sales commission on the UL term-conversion.

Who are the investors in the Life Settlement Market?

Over the past 30 years, the secondary market for life insurance has evolved into a mature, well-regulated asset class.

In the early stages of the market, institutional investors included Goldman Sachs, Credit Suisse, and Deutsche Bank.

At that time, only a handful of states regulated the market.

Today, some of the world's most prominent institutional investors are participating in the secondary market for life insurance comprised of hedge funds, pension plans, banks, insurance companies, endowments and top-tier investors such as Blackstone, Apollo, KKR, Carlisle, Ress Capital and others.

In terms of the regulatory landscape and market maturity, 43 states and the territory of Puerto Rico now regulate life settlements.

By all indications, the market's future looks promising with double-digit growth expected.

A recent report by Conning Research predicts that by 2028, "the life settlement market will have seen an impressive $212 billion of life settlements."

Take Away

With more aggressive sources of capital entering the life settlement space, now may be the time for financial and insurance professionals to discuss life settlements with their older clients.

In addition to optimizing the cash liquidity of a dormant asset, clients who qualify for a life settlement will eliminate an unwanted premium expense while receiving a cash windfall to help boost their retirement assets.

Jeff Hallman and Scott Thomas are co-founders and managing partners at Asset Life Settlements, a life settlement brokerage company based in Orlando, Florida. Hallman can be reached at (888) 335-4769, extension 1108, and Thomas can be reached at (888) 335-4769, extension 1115.