Back in the day, the life settlement market was as crazy as the Wild West. Funders were making insane offers on anything you’d throw in front of them. A dozen years ago, with the financial collapse and significant changes in life expectancy calculations, things changed dramatically, and the market largely dried up.
Fortunately, for policy owners, the market is still alive and well. I’m currently working on a couple of situations in which policy owners have been well served by the existence of a currently thriving life settlement market.
In one case, a trustee called me because a $2 million trust owned policy was collapsing, and the insured had made the decision to surrender it for its cash value of $85,000. This was a Transamerica policy that was subject to terribly dishonorable tactics. When Transamerica decided it didn’t want to pay death benefits on a certain book of business, it simply jacked up the mortality expenses dramatically even though it didn’t realize adverse mortality experience. This was also a strategy to make the policies less attractive to the life settlement market.
Fortunately, I could get the trust a half million dollars for the policy so the family had something, and Transamerica is still on the hook for paying the death benefit.
In another situation, four business owners were victims of fraud. Each had a $3 million universal life policy for business purposes, but after being tied up in court for seven years, the policies were gutted, and the ongoing premiums to keep them in force were sky-high and unsustainable.
The cash values of the policies were literally almost zero as they were paying monthly mortality charges to keep the contract in force while we worked through the process. In the end, we’re getting the partners $2 million of cash, which is exactly $2 million better than getting skunked by letting the policies lapse.
Finally, a family with a $100 million insurance portfolio realized late in the game it was all in grave danger of lapsing, and there’s no alternate source of funding. We’re settling a portion of the portfolio to get millions of cash infusion for the balance. There will still be a loss, but tens of millions of death benefit will be salvaged rather than losing everything.
Prohibiting Life Settlements
While it’s almost impossible to believe, there are still insurance and financial service companies that prohibit their agents and reps from bringing life settlements to their clients. This is one of the most egregiously skanky practices I can think of; intentionally keeping their clients in the dark regarding potentially vast sums of money while letting their underperforming and unwanted insurance assets to die a slow, undervalued death.
It’s not difficult to be one of the good guys and a hero to your clients.