Naturally, every company in the life settlement industry has been watching the news roll-in about Life Partners, the provider company in Texas that declared bankruptcy and has been accused of misleading investors among other misdeeds.
While it’s best to leave the ugly details to the pundits, the main lesson for the wealth management community is that Life Partners is not representative of the life settlement industry. The company had a renegade reputation for some time.
First some background:
Every life settlement provider is divided into two distinctive sides, which I sometimes like to refer to as the front of the house and the back of the house. The front refers to the side of the business that is responsible for acquiring and sourcing policies for possible sale while the back of the house matches investor funds to the policies that are acquired. Since our industry began, we have had to balance the need to source policies with the requirements for purchasing them. During my entire career, both sides of the house were rarely in perfect balance. Some years we had more funding than policies and in others more policies than funding. Such is business.
Yet, we have learned over time that both sides of the house should remain distinct. And as the industry transitioned to purchasing larger policies from more diverse clients, we realized that the funding side of the business was becoming much more complicated – and too complex for us to involve individual investors. For the past 10 years, most life settlement providers completely abandoned all but institutional investors and the most sophisticated accredited investors.
Much to the disbelief of many, Life Partners and its related entities went in the other direction and continued to take individual investor capital and sell fractionalized interests in individual policies.
The distinction is very important. The bulk of the life settlement industry chose to build large portfolios of policies, covering many lives and taking advantage of the tested reliability of such portfolios – and chose to fund these with Wall Street backing. By contrast, Life Partners continued to match Mom and Pop investors with individual policies.
Our CEO has been on the record, for more than a dozen years, saying that no individuals should invest in life settlements. This is an investment class best left to the big boys. Unfortunately, some less responsible organizations have continued to take on individual dollars, and these more shifty operators are usually the sources of the negative news that sometimes plagues our industry.
Wealth managers and financial advisors should understand a few key things about life settlements today:
The money behind a life settlement company matters. The life cycle of a life settlement transaction is longer than most other investments. The institutions investing in or partnering with our industry have an investment horizon that might as well be measured in decades. The organizations which have become heavily invested in life settlements are in it for the long haul, as many policies are purchased with maturation often more than 10 years in the future. Anyone looking for or promising a quick payoff is misguided at best. In addition, proposed complex rules regarding anti-money laundering and other regulatory issues make it paramount to sell a policy to an institutionally funded provider.
You want your client’s policy to go into a portfolio. While advisors are expected to secure the best possible deal for their clients, trust me when I tell you that you want your client’s policy to be purchased and aggregated into a large portfolio -- managed by an institutional funder. Your client does not want their policy sold as a fractionalized investment to retired couples. Yes, once the transaction is complete and your client has their money, they have nothing to worry about, but, believe me, you want that policy as one of many in a portfolio.
We don’t want your clients to invest in our industry. And here I sound like a broken record, but the life settlement industry doesn’t need your clients’ investment dollars, and you shouldn’t encourage them to invest in life settlements. The reputable companies have institutional capital and don’t need or want your clients’ money.
The front of the house does want your clients’ unneeded or unwanted policies. Life settlements remain the option of choice for senior clients who no longer need or can no longer afford their life insurance. A life settlement will pay more than the cash surrender value, and the proceeds can be used to invest in another product or pay for retirement.
Everyone can learn from the latest developments, particularly how one renegade player shouldn’t impact how you view an entire industry.
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