The life settlement market continues to evolve as is it becomes a critical part of a growing strategy for clients to liquidate assets in favor of better-performing financial products. Changes are all positive for advisors and wealth managers, with stronger institutional capital entering the market enabling faster offers and improved competition. Increased education among the advisor community has driven other beneficial changes. The result is a healthy market, with growing demand from seniors to liquidate under-performing life insurance policies and redistribute wealth with the assistance of their advisors.
Balancing Portfolios and Client Needs
For advisors, liquidating a client’s life insurance policy enables you to transform a passive, unused, forgotten or outdated asset —the life insurance policy — into a timely solution to a client’s problem. While we regularly think about putting money in motion by reducing real estate holdings, selling a business, or taking money out of the stock market, we forget that a life settlement can generate hundreds of thousands – even millions of dollars – of funds that can be reinvested for a client’s retirement.
Irrevocable life insurance trusts (ILITs) offer an exceptional way to help HNWIs preserve their wealth and manage future estate taxes. However, the life insurance policies held within such trusts may not be performing at satisfactory levels, as investable capital may be trapped paying for existing policies within the trust. When trustees perform required evaluations of insurance policies within an ILIT, a life settlement may be in the best interest of the beneficiaries, by freeing-up capital for investment. Some licensed life settlement funding companies now perform annual policy evaluations at no cost, making the process simple and streamlined.
Capital Aligns with Goals
One of the biggest changes in recent years has been what we like to refer as the “alignment of capital” with business goals within the industry. For many years, life settlement companies were dependent on complex outside financing programs that didn’t always match with the long-term goals of the industry. Many companies had an over-reliance on lines of credit, for example, and when the credit industry crashed during the recession, these same companies struggled mightily. In addition, some institutions came into the industry with much shorter investment horizons than made long-term sense for the industry, and this again caused funding stresses.
Today, many companies in the industry have created closer partnerships with funding sources and better-aligned their long-term goals. The industry’s extended outlook is more promising than ever due to this key change. We believe that this will ultimately lead to increased transparency and better and faster offers made to advisors on behalf of their clients. Provider companies which offer value-added services, better customer service and work faster will gain more customers; and the entire industry wins. In the next six to 18 months, advisors will see more options and increased competition for policies and decreased backlogs. Advisors reviewing options for their clients should ask providers how they are funded and look for companies with a long-term funding partnership.
Advisor Education to the Forefront
The industry knows that advisors are key players and increased education will be paramount and visible. Earlier this year, The Lifeline Program and WealthManagement.com surveyed financial advisors about the industry and more than 40% of respondents were either unfamiliar or had only “heard of” life settlements. While nearly half of respondents were aware of them, only 11% had either recommended a life insurance policy liquidation to a client.
We clearly have a ways to go, particularly given that liquidating assets like life insurance policies could provide significant opportunities for advisors. The survey found that 70% of advisors actively look for liquidity events as part of their marketing strategy. Yet this group has failed to capitalize on an opportunity to put money in motion using life settlements, as only 18% of those surveyed cited life settlements as a strategy to provide clients with revenue for new investment opportunities. The survey also found that many advisors still believe that the transactions are only for the terminally ill, and others believe them to be “morbid” and “creepy.” The industry has been combatting some of these issues for decades, so expect new education efforts aimed at advisors soon.
Advisors interested in learning more about life settlements should look for the many resources offered by providers, including webinars, white papers and instructional materials. The industry knows that ongoing education is critical for the industry to continue to move forward, and take advantage of its current momentum.
Stephen E. Terrell is Senior Vice President of Market Development and Branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. You can also follow him on Twitter @LifelineProgram.