The Senior Life Settlements market has a perception problem. As the late, great Rodney Dangerfield would often quip, “No respect…I get no respect.” And so goes the challenge with Life Settlements. Advisors and investors are not getting the whole story because many in the financial press have not done adequate due diligence and in some cases, have formed opinions based on only a cursory glance.
Life Settlements -- Debunking the MisconceptionsSo, let’s take a deeper dive into the truth about the Senior Life Settlement Asset Class. Once it’s understood that much of the conjecture surrounding the industry lacks credibility and objectivity, Senior Life Settlements will receive the respect that they’re due…This is an idea that’s time has come.
Life Settlements are Morbid!
To some people, the very thought of purchasing an interest in a life insurance policy for anyone other than themselves, a close relative or maybe a business partner, may initially be viewed with a negative connotation. For some, the idea of receiving financial gain from someone’s death simply cannot be overcome and that is OK. This is the same type of reasoning behind the emergence of socially responsible asset management that avoids investment in “Sin” stocks of companies that sell tobacco, alcohol, firearms and the like. It is an individual choice based on our own unique belief systems. The wallet always follows the heart. As the morbidity aspect of Senior Life Settlements are concerned, peeling back the onion a bit more will reveal a more holistic understanding when you make the effort to look all the way down to the bottom.
Senior Life Settlements uniquely create value for both the buyer and seller in meaningful ways. Until settlement was an option for the disposition of an unwanted, unneeded or unaffordable life insurance policy, the insurance companies only offered two options:
- Stop making premium payments, let your coverage lapse and effectively lose all of your previous premium investment and release the insurance company’s contractual obligation to pay benefits, or
- Surrender your policy for a lump sum payment, the price of which is determined solely by the issuing life insurance company.
According to research released by the Life Insurance Settlement Association (LISA) in 2015, American’s over 65 lost approximately $112 billion in benefits because of lapsing or surrendering policies. It is true that the mortality of the insured is the trigger that creates the payment of benefits to the investor. But it must not be overlooked that by investing in this asset class, you are improving the financial life of a senior citizen as well as your own. Some like to call this mutually beneficial equation “Doing well by doing good.”
“It’s not the years in your life that count…It’s the life in your years that matter.”
-Abraham Lincoln
Life Settlements are Predatory!
Predatory investment practices infer that there is an obvious, vulnerable target being pursued by those with nefarious intent to defraud. Seniors are often the targets of such schemes which have been well documented in the press. Relative to the Senior Life Settlement industry, State Insurance Commissioners have adopted regulations to which a Provider (Licensed and regulated entity that works either directly or through the insured’s representatives to affect a life insurance settlement transaction), as the public facing entity, must comply. The Senior Life Settlement industry has established consumer protection regulations and best practices guidelines in all fifty states and Puerto Rico.
How Does a Senior Life Settlement Work? The truth is that a senior in peril of lapse or considering surrendering their coverage makes a conscious decision to pursue a settlement provided they are aware that this option exists. Several State Insurance Commissioners have mandated to the life insurance companies operating in their state that they must make the insured aware that settlement is an additional option to lapse or surrender. The fact is that the secondary or Senior Life Settlement industry is still largely unknown by the populace and the life insurance companies would prefer to keep it that way. But for those seniors who are aware and choose a settlement as the preferred option, the financial benefits of putting their policies up for sale in a regulated, competitive bid market has resulted in a comparatively significant financial advantage to the seller:
“According to a U.S. Government Accountability Office (GAO) report analyzing over 1,000 policies, seniors selling their policies in a life settlement transaction received as much as 4-8 times as much money as they would have had they surrendered the policy to the life insurance company. Life Settlements are good for consumers and result in giving seniors a higher standard of living in retirement.”
Life Settlements are Risky!
Senior Life Settlements derive yield from only one single trigger: The mortality of the insured. Life Settlements are a buy and hold strategy that offer no liquidity until a policy matures. Once you have executed the transaction, you are fully invested. Every investor should carefully consider their liquidity needs from other sources of income or reserves before investing. And, because human longevity cannot be precisely predicted, an investor should expect, in some cases, to be subjected to extended longevity and possible premium calls. Time to portfolio maturation and liquidity are the primary risk factors to be considered before investing.
If one compares their “at-risk” capital to an allocation of Senior Life Settlements from a risk-adjusted thought process, a typical portfolio of market-based equity and debt has a correlation co-efficient to everything…Geo-political upheaval, Fed-Speak, market volatility, natural disasters, etc. Senior Life Settlements require time and planning. So, for the risks of time and opportunity cost, the Total Projected Yield to Maturity (TPY) is attractive Risk Premium relative to other similar risk-adjusted options.
Speaking of Risk-Adjustment, Senior Life Settlements fall in the category of alternative fixed income. The 10-Year Treasury Bond is considered the “Risk-Free Rate” because it is backed by the Full Faith and Credit of the US Treasury. That is as safe as it gets. The US Legal Reserve System is the charter that backs the US life insurance industry. In fact, in the over 150 years that the life insurance industry has existed, there has never been a precedent set that a legitimate claim has failed to be paid on a contract in good standing. The life insurance industry has a flawless track record of keeping their promise to pay death benefits.
Life Settlements Create a Question of Ownership!
The Supreme Court determined in 1911, in Grigsby v Russell that life insurance policies are personal property that may be assigned at the will of the owner. In his concurring opinion, Justice Oliver Wendell Holmes noted that life insurance policies possess all the ordinary characteristics of property, and therefore represent an asset that policy owners may transfer without limitation.
To provide maximum protection for investors, each investor owns a pro-rated share of an Issuer’s Policy Protection Trust as a beneficiary. The Trust preserves the store of value in the life insurance contract and by statute, requires any income derived at the trust level to be distributed to the beneficiaries as received in a timely, efficient manner. As contracts mature, investors receive maturity payouts in accordance with their proportional share of each individual contract’s face amount within a portfolio.
Life Settlements are Complicated!
Life Settlements are an alternative investment and like REITs, Private Equity, Hedge Funds and other alternatives, they have a learning curve attached to them. That is why it is an alternative to more commonly known asset classes like debt and equities. Life insurance is already a complicated matter. Ask almost anyone that has ever gone through the process of buying a policy and they will tell you that it took some effort to understand.
Life Settlements like any other investment opportunity should be thoroughly vetted by both advisor and investor. But the value proposition is very simple in its final iteration. The investor is buying a dollar at a discount to be received in the future. All of the rights appertaining to the life insurance contract are transferred to the investor. An investor in a diversified portfolio of Senior Life Settlements will receive a series of variably-timed payments as each policy in the portfolio matures. The spread between the investor’s acquisition cost (purchase price to the seller plus premium escrow) and the face amount of the policy is the Portfolio Yield to Maturity (YTM). Unlike other investments, the total cost and yield are known in advance…time to policy/portfolio maturation is the unknown.
As the Senior Life Settlement industry evolves, standardized market exchanges like the NYSE, NASDAQ or CBOE may develop. The phraseology of “Bringing Order to a Disorderly Market” is emblematic that the simplicity of the Senior Life Settlement Asset Class that appears above the water line is the final iteration of a transparent, rigorous and consistent due diligence process and a thoughtfully engineered business model. Advisors and investors turn to alternative investment solutions to either grow, preserve and/or protect their asset base. Senior Life Settlements can accomplish all three objectives.
As an Advisor, you are by nature an entrepreneur. The growth and health of your firm is directly proportional to your leadership and vision. An Advisor's competitive success is predicated on the client’s delight factor and you are in a dog fight every day for their mind share. The Senior Life Settlement Asset Class is a value-added differentiator that is accessible, now, to help you break out from the pack.
Call Jason Bokina at 404-504-7006 or email contact@capaltstrategies.com.