Life settlements enter the mainstream

By M. Bryan Freeman

Imagine that you just bought a beautiful new car for $50,000. After three years you decide that you no longer want the car or can afford the payments. What if you were told that your only option was to sell the car back to the manufacturer, for nothing or a small fraction of the car’s actual value? You would be upset, and justifiably so. However, with very limited exceptions, that is exactly the situation that has existed for life insurance policies for over a century. Historically, there was only one potential purchaser for a life insurance policy – the issuing insurance company. Because there was no competition for the repurchase of policies, there was no reason for insurers to offer more. When you took your policy back to the “dealer,” the only possible “purchase price” was the policy’s cash surrender value (CSV).

With a secondary market for the purchase of a life insurance policy virtually non-existent, a vast number of policies were lapsed every year, with the result that owners received little, if any, of the economic value for their asset. Incredibly, it is estimated that 93% of all policies issued lapse before paying a claim.

It was a virtual certainty that free market innovation would develop an alternative to the artificially low CSV repurchase price. Simply put, the secondary market gives policies liquidity similar to more familiar tradable commodities, like residential mortgages and stocks (and even cars). Now, market forces ensure that a large percentage of life policies are worth significantly more than their CSV. In fact, it is possible for a policy owner to receive anywhere from 1.5 to 1000 times the amount of the CSV in their policy (depending upon the type of policy and the amount of CSV, if any, accrued in the policy). In my experience, life settlement providers can pay more than CSV in at least 80% of the cases presented.

The emergence of a secondary market for life insurance was a historical inevitability. For many Americans a life insurance policy is one of the most valuable assets they will ever own. Free markets will always eliminate artificial restraints on trade; thus, the ability to receive maximum value for a life insurance policy was a rational and necessary response to an issuer-dominated market that deprived policy owners of the fair value of their policies.

The life settlement industry finds it origins in the viatical settlement transactions that occurred in the late 1980s and 1990s. This was a time when a large group of terminally ill individuals found themselves in desperate circumstances. Fortunately, a few entrepreneurial minds had the vision and creativity to realize that the value in life insurance policies could be tapped to offer some relief. In a sense, the settlement industry that exists today is the great-grandchild of those viatical settlement transactions. That is, as in a viatical settlement, a life insurance policy is sold in the secondary market. However, just as families change over generations, the current life settlement market bears little resemblance to its forbearer that existed 15 years ago.

Any discussion of the history of settlements must touch on the fact that, like any emerging business, the settlement industry had some bad actors who became involved when the industry was still viatical-focused. The damage done to the reputation and credibility of the industry by a few unscrupulous people continues to this day. Those of us who have been in this industry since its inception, and have always adhered to the highest ethical standards, applaud the Viatical and Life Settlement Association of America, the regulators and legislators who have helped shape the industry into its current state of respectability and accountability.

However, the benefits that the settlement industry has brought and continues to bring to those who wish to sell their policies far outweigh the actions of those who sought to manipulate settlements at the expense of others. For instance, the widespread emergence of accelerated death benefits would not have come about, except as a response by life insurance carriers to the fact that seriously ill insureds had a new market for their previously unsaleable policies. Additionally, life insurance companies are offering many new products that are a direct outgrowth of the competition created by the settlement market. We now see life insurance companies offering many new hybrid policies that combine long-term care, stated disease, disability coverage and other product innovations into one policy.

While some life insurance companies may complain that the sale of policies into the secondary market is unfair and harms their financial bottom line, as a practical matter the very existence of the secondary market has increased the value of life insurance, which in turn drives demand for the issuance of new policies. The quiet entry of a few life insurance companies into the life settlement market is a strong statement that even insurers acknowledge the value of this new and exciting asset class.

Another factor that has fueled the explosive growth of the industry is the viatical and life settlement legislation enacted by the U.S. Congress and legislatures of numerous states. Currently, there are approximately 36 states that regulate viaticals (typically, transactions where the insured has less than 24 months to live), life settlements (typically, the insured is over 65 with a life expectancy of more than 24 months) or both. Regulation has brought the life settlement market into the mainstream and ensures that all parties: owners, insureds, financing entities, settlement brokers and settlement providers are protected.

The potential size of the life settlement market is extraordinary. According to Conning & Co. and the Viatical and Life Settlement Association of America, the estimated face value of policies settled in 2001 was between $1.8 billion and $4 billion. Based on my experience, it is fair to say that this number has increased 20-25% every year since. Perhaps the most amazing fact is that these settlement numbers are taking place in an environment in which the overwhelming majority of legal, financial and insurance professionals practicing in America today still have not been adequately educated about the value created by the secondary market for policies. In 1999, the last year in which solid data is available, Conning and Co. estimated that the total value of life insurance policies held by senior citizens was over $490 billion. Thus, even if it was assumed that there was no growth in the industry since 1999, and only 15-20% of eligible policies were appropriate for settlement, the potential market would be over $100 billion. Needless to say, the delta of at least $96 billion represents an exceptional opportunity for policy holders.

From its origins as a last resort for the terminally ill, the life settlement industry has emerged as one the most dynamic asset classes to come into existence since the secondary market for residential mortgages. Today, life settlements are most often undertaken for reasons of estate and financial planning. These sellers are not in distress; rather, they know they can now find new value in policies that have become too expensive to maintain, that are not performing up to expectations or for which the original need no longer exists. The robust life settlement market continues to expand exponentially as more and more financial and legal professional become educated about the possibilities of a settlement, and add it to their tool kit as a means to help their clients achieve their financial goals. 

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M. Bryan Freeman has been a licensed insurance agent for 26 years and has helped people sell their life insurance for cash settlements for more than 15 years. He is now in his third term as president of the Viatical & Life Settlement Association of America (VLSAA), the industry’s oldest and largest trade organization. Freeman has long been involved in the development of responsible legislation and regulation for the secondary market for life insurance.

Habersham Funding provides the funds for life settlements, which enable seniors who no longer want or need their life insurance to receive an advance cash payment for their policy. Though the same option may be available for people of any age who are seriously ill, Freeman says the majority of Habersham’s business comes in the form of high-net-worth seniors who seek settlement solutions as a means of financial and estate planning.

Habersham is licensed as a settlement provider in Arkansas, Illinois, Maryland, North Carolina, Ohio, Pennsylvania and Tennessee. The company also conducts business in a number of other states in which no license is required, including its home state of Georgia.

Electronic and hard-copy photos of Freeman are available, if you require such, as is a Habersham Funding LLC logo, and the logo of the VLSAA.