An Insurance-Licensed CFP Considers a Life Settlement

As life settlement transactions gain more ground as a valuable financial strategy to protect the client's best interests, many insurance professionals who are unfamiliar with the inner workings of the secondary market for life insurance feel obligated to boost their professional knowledge in order to competently represent their policy-seller clients.

This article details one of our recent life settlement cases involving a life-insurance-licensed CFP who decided to sell his own policy to gain the experience he needed to represent his clients' best interests.

We will also highlight recent studies and data pointing to a favorable market ahead.

Insurance Licensed CFP Walks the Talk

This case involved a 65-year-old life licensed CFP affiliated with an independent broker-dealer.

The BD's compliance policies required that agents engaged in life settlement transactions use only those life settlement brokers from the organization's preapproved list of brokers.

As a result, our firm was asked by the agent-CFP to handle the case and negotiate the highest possible offer for the policy.

The insured's $2.8 million term policy had been purchased earlier in his income-producing years and was nearing the end of its 20-year term.

In reviewing his options, the agent determined that allowing his policy to simply expire was not an attractive choice.

He considered converting the policy to a universal life policy, but the $5,000 monthly premium to maintain the policy was neither financially prudent nor affordable.

Having weighed all the options, the CFP decided that converting and then selling the UL policy in the secondary market was a sound course of action that would benefit him both personally and professionally.

From a personal standpoint, selling the policy meant he could receive a cash payout and thereby recoup some of his premium investment over the years.
From a professional perspective, the experience of selling his own life insurance policy would provide hands-on knowledge to help fulfill his duty of competency to clients.

When working with agents and their clients, the initial step at our firm begins with a free, no-obligation consultation involving a policy evaluation and life settlement prequalification.

Determining the insured's eligibility and providing an estimate of the policy's value in the secondary market is essential to the client's decision-making process and helps set expectations.

Following the prequalification process in this case, we informed the CFP that his young age of 65 could present a challenge in terms of generating acceptable offers from institutional buyers.

Although it was a long shot, the agent was still determined to proceed because of the valuable experience he would gain that would help him fulfill his duty of competency to his clients.

After submitting the case to a handful of buyers known for purchasing policies from insureds with longer life expectancies, we were able to generate competitive offers for $15,000, $22,000, and $30,000.

The agent was gratified to accept the $30,000 payout, and he was especially pleased to earn a commission on the UL term conversion.

"The first-hand experience of converting and selling my own term policy enabled me to more effectively advise my senior clients about the process," the CFP commented.

(We would like to note that this practitioner granted us permission to publicly share the details of this case in order to benefit his fellow fiduciary practitioners.)

Transaction Volume Points to Future Growth

For nearly 25 years, the life settlement marketplace has demonstrated its value as a smart financial solution for high net worth seniors with unwanted or expiring life insurance coverage.

Large insurance policies that were purchased years ago as a component of a comprehensive estate plan may no longer be relevant once children are grown or a business is sold.

Or, a trustee may decide it no longer makes sense to maintain a marginally beneficial trust-owned life insurance policy where the accelerating premiums are draining cash assets from the estate.

Whatever the specific situation may be, thousands of seniors have benefited financially by selling unwanted policies and using the cash for more pressing needs.

According to a recent market data survey conducted by Life Insurance Settlement Association (LISA), consumers were paid over $750 million for their unwanted life insurance policies in 2021.

Other highlights from the survey revealed the following:

Consumers received an average of 7.8 times more than their cash surrender value (representing over $660 million more than policy owners would have received from life insurance carriers.)
In 2021, more than 3,000 transactions were conducted by LISA members totaling over $4 billion in face value.
The average amount of net death benefit per transaction was $1.35 million.
LISA estimates indicate that life insurance policies valued at $642 billion are allowed to lapse or are surrendered annually by consumers because most are not aware of the life settlement option.

While recent growth in the market is attributed to a more mature state regulatory environment and broader consumer acceptance of the option to sell obsolete policies, growing numbers of insurance and fiduciary professionals are also viewing life settlements as a prudent exit strategy from burdensome coverage.

More policy owners are recognizing that selling a policy creates a liquidity event for an otherwise static asset.

Not only does the seller receive a cash payout multiple times the policy's cash surrender (if any), but also they effectively shift an unwanted expense to the income column.

In the case of expiring term policies with no intrinsic value, or in the case of a UL policy about to lapse, selling the policy is clearly the best possible solution.

The proceeds from selling the policy can be repurposed to achieve other financial goals, such as investing in new products or paying for long term care.

Will the Market Exist in 10 Years?

In a Nov. 1 news announcement by industry researcher Conning, the market forecast calls for a double-digit increase in the annual gross market over the next ten years.

The two primary drivers contributing to Conning's optimistic outlook include the likelihood that (a) seniors will seek sources of income to help offset economic pressures, and (b) the continued strong demand for investors seeking to place their money in alternative asset classes.

In subsequent articles, Scott Hawkins, head of insurance research at Conning commented that "Given the favorable nature of the drivers of life settlement market growth, our analysis of the life settlement market is that the average annual volume of new life settlements over our ten-year forecast is approximately $5.2 billion."

Based on the above, as well as our as our personal insight gained from more than 25 years of experience in the industry – our team at Asset Life Settlements is encouraged that the life settlement market is poised for continued growth over the long term.

Takeaways

The evolving consumer-first regulatory environment and the tightening of fiduciary standards have had an unexpected impact on the life settlement marketplace: Greater numbers of insurance and fiduciary professionals are recommending life settlements to seniors because selling the policy is often deemed in their clients' best interests.

In order to effectively and competently represent clients who want to sell their policies, some financial professionals feel an obligation to gain first-hand experience with life settlement transactions – even to the extent of selling their own policies.

As 2023 approaches, financial and insurance professionals have an opportunity to examine their book of business and reach out to older clients who may be looking for strategies to generate extra cash flow.

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 achieve other retirement objectives.

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.