The current stock market volatility has most of the country on edge. But for professional advisors whose senior clients may be seeking to sell their life insurance policies in the secondary market, and for institutional investors who purchase them, there’s an upside to the stock market’s downslide.
What’s the upside? The short answer is that the uncertainty of the stock market often drives institutional investors to uncorrelated asset classes that aren’t subject to the ups and downs of Wall Street. When more institutional capital flows into the secondary market for life insurance, the offering price for policies moves up a notch – especially when policy supply is limited.
Secondary Market Creates Value
The secondary market for life insurance has existed for nearly two decades simply because it creates value for sellers of policies and for the institutional investors who purchase them.
For sellers who no longer need life insurance because their circumstances have changed, the secondary market provides senior consumers with an option to monetize and optimize an unwanted financial asset and shift that liquidity to other needs. A prime example involves seniors who had originally purchased life insurance policies for estate tax purposes. With the 2012 passage of the American Taxpayer Relief Act reducing the estate tax burden, many seniors remain saddled with high premiums for life insurance policies they no longer need. In short, a life settlement is often the most financially attractive and fiscally responsible solution for an unwanted policy whose high premium payments may be unnecessarily depleting the senior’s retirement savings.
For institutional investors, the secondary market provides a forum to capture yield in today’s low interest rate environment while insulating portfolios from stock market volatility. In short, institutional investors are drawn to longevity risk (life settlements) due to the asset class’s somewhat predictable returns and its non-correlation to the financial markets. Institutional investors willing to commit a life settlement portfolio to a 10-year horizon often stand a better chance at a double-digit return than with more conventional asset classes tied to the stock market.
Competition For Product Flow
Over the past 18 months, providers who purchase policies have seen an increase in institutional capital entering the market, giving providers more latitude to compete for product flow. Earlier this year, Abacus announced an additional $250 million of funds received from our capital partners for policy acquisition, and other providers we’ve spoken to have experienced similar infusions of capital.
Although policy acquisition data for the first half of 2015 is incomplete, it appears we’re starting to see signs that the amount paid to senior consumers (as a percentage of face value) has started to increase. According to industry data published by The Deal, the average amount paid for life insurance policies in 2014 “as a percentage of face value,” increased to 22 percent in 2014, up from 18 percent in 2013. The average face value of policies sold in 2014 was approximately $1 million.
Using the example of a life insurance policy with a face value of $1 million, the average amount paid by life settlement providers to purchase policies in 2014 was $220,000.
Efficient Secondary Market
Sufficient product flow is critical for the secondary market to operate efficiently. Institutional investors looking to build a well-diversified portfolio capable of delivering double-digit returns must rely on a network of agents, estate planning professionals, brokers and providers to generate transactions meeting specific funding criteria.
Coupled with the fact that only 20 percent of the transactions that reach a provider’s desk are actually funded, the product flow demands are obvious, and the need to improve market efficiencies starting at the point of origination can’t be overstated.
Articulating a Balanced Value Proposition
Before letting a client surrender a policy or allowing it to lapse, advisors have a responsibility to lay all the options in the table – including a life settlement. Some seniors who’ve allowed policies to lapse later indicate they wished they’d known that a life settlement was an option. In January 2014, one California couple sued a national carrier for failing to inform them about the life settlement option.
Inasmuch as life insurance is often tied to one’s overall estate planning and retirement objectives, advisors will want to have the big picture in mind as they sit down with the client.
Estate planners, insurance agents, CPAs and other advisors have an opportunity to discuss the pros and cons of a life settlement with their senior clients during the course of their quarterly planning meetings or during tax season. For some advisors, the month of October is the perfect time to meet with clients because it falls during National Estate Planning Awareness Week and Financial Planning Week.
Some advisors have chosen to educate their clients by simply pointing them to various websites
that explain how life settlements are being used for long-term care, nursing home and medical expenses. Examples include the U. S. Department of Health & Human Services and the American Cancer Society.
1. Based on an analysis of 2014 life settlement data contained in The Deal special report released in June 2015.
Samantha Butcher is Director of Operations for Abacus Settlements, LLC.