|  | | | Exploring the life settlement option for clients. The National Underwriter Company |
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| | Mon, 10 Nov 2008 14:20:04 GMT | | By Matt Brady
Life, as they say, is for the living, and the same principle applies for life settlements. But advisors can help clients selling their policy to live a little longer by ensuring their long term care needs will be met.
Depending on personal circumstances, a client may decide that ensuring adequate LTC is more important than providing a benefit for loved ones after death. In that case, a life settlement can play a role in paying for that care.
A number of older insureds are considering just such an option, says Robert Sweeney, a partner with Life Asset Advisors in Buffalo, New York.
“At a certain age, it’s more important to have LTC insurance than to have life insurance,” he says.
Many policyholders reach an age where their house has been paid for and their children have grown and no longer rely on them, Sweeney continues, citing himself as an example. “A lot of people feel that way,” he says.
A “core element” of the concept, according to Mark Goldstein, director of advanced markets for Great West Growth Life, is that many individuals who would consider selling a life policy are the same ones who are facing LTC needs.
“There’s a tremendous intersection between those who can benefit from a life settlement and those concerned about LTC,” he says.
Conducting a life settlement and obtaining LTC coverage are two separate transactions, and one should not be affected by the other, Goldstein points out.
A desire to fund LTC, which would be expected to extend the insured’s lifespan, will not affect the settlement process, or the price offered for a policy, Sweeney notes. “They (the funders) don’t care what you do with the funds.”
Sweeney says he often makes presentations to insurance agents and advisors regarding the benefits of life settlements, and he includes information regarding the LTC option in that presentation.
For the agent, using a settlement to fund LTC can provide an opportunity to receive a “double commission,” he notes. Not only would the agent receive a referral commission for the life settlement, he explains, but the agent would also be compensated for placing the LTC policy for the client.
Given the nature of LTC policies, in particular their pricing, policyholders would be best served by shedding unwanted life policies as soon as possible, Sweeney says. In purchasing LTC insurance, he explains, “the younger, the better. LTC insurance is cheaper the younger you are, unless you’re seriously ill.”
Once the funds from a settlement are in hand, Goldstein says, the individual has 2 general options. The first, according to Goldstein, is to purchase coverage using a single lump sum payment. There are not a lot of companies that offer that right now, but the number is growing,” he says. Some of these policies offer a degree of flexibility, serving initially as an annuity that can be accelerated to cover LTC costs or even with an added life insurance element.
As laws governing annuities with LTC features change, Goldstein predicts, “you’re likely going to see more of these.” Currently, money taken out of an annuity to pay for LTC coverage is taxable, he explains, but under the Pension Protection Act, that will no longer be the case starting in 2010.
A second option, Goldstein says, would be simply to take the funds obtained in a settlement, invest it, and use the interest payments or dividends to pay the premiums for LTC coverage on an ongoing basis. This option would create greater flexibility and choice for the individual, who would face a wider array of coverage and pricing options that could be tailored to meet their specific needs, he says.
As with any financial move, there are inherent risks about which policyholders should be aware and potential alternatives that might be a better fit. “As with any financial transaction, individuals have to look at what is best for them,” Goldstein points out, and they should consult with an expert to evaluate needs and opportunities.
Brad Feldman, a vice-president at Birmingham, Mich.-based Schechter Wealth Strategies, says the decision to sell a policy in a life settlement should be based upon a client’s unique circumstances and objectives. “That’s personal choice,” he says, noting that selling a policy may carry unintended consequences that would not occur under other options.
“There are some risks that go along with selling a policy,” Feldman says, specifically noting that income gained in the transaction could reduce the client’s government entitlements or benefits which may have been contributing to their LTC funding in the first place. In addition, Feldman points out that proceeds from a settlement may be subject to taxation.
However, he adds, if the life policy, and the eventual death benefit, is truly unneeded, then a settlement may be the right solution for a client. “Depending on the client’s health and need for life insurance, it could be a win-win,” he says, noting a client may receive the liquidity from the life settlement to fund LTC needs as well as obtain a replacement life policy that is competitively priced.
But other options also exist. For example Feldman points to extra-contractual loans. These are lent based on the life policy’s secondary market value, rather than cash value of a policy. These loans offer many of the same benefits of a settlement, such as immediate funds and elimination of the insured’s needs to pay premiums, while leaving the policyholder at least some portion of the death benefit.
At least one notable insurer is starting to offer these extra-contractual loans, Feldman notes, and at least one lending firm has signaled its intent to enter the market.
“The thought is that this will be a competitor for traditional life settlements,” he says, but he cautions that which choice is best for an individual will always differ from one person to the next.
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| | Wed, 05 Nov 2008 22:37:43 GMT | |
The question was: I have a client who is age 66. He has decided to stop paying premiums on his $150,000 term policy. Could he possibly sell it in the secondary market or is the face amount too small?
The answer is: There is a market for smaller policies. Some life settlement providers like Coventry First have the ability to purchase policies with a minimum face amount of $100,000. Coventry First’s policy valuation process is expedited through a Simplified Settlement questionnaire, which the insured and owner sign verifying policy information and medical history.
For these smaller policies, valuations can be performed quickly upon receipt of the application. Typically, your client’s term policy would have to be convertible, which means you as the advisor could be the writing agent on the converted policy. A win-win for both you and your client.
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| | Tue, 04 Nov 2008 16:00:24 GMT | |
The question was: According to a recent Conning study, in roughly what year will the market for life settlements level off?
a) 2010
b) 2012
c) 2015
d) 2017
e) It already has
The answer is: b) The growth in the life settlements market should start to level off in 2012, according to Conning, city state. Read related article here | |
| | Fri, 10 Oct 2008 15:29:16 GMT | |
By Linda Koco
“Term to perm” has become a new trend in the life settlements market, according to William Scott Page, president and chief executive officer of The Lifeline Program, Atlanta.
In a nutshell, term-to-perm settlements involve settling level term life policies that have been converted to permanent policies (universal life or whole life). Usually, the conversion is done as part of the settlement transaction.
This trend marks a significant expansion of the market, say experts.
Up to recent times, level term policies were not settled, says Page. The institutional and equity markets traditionally require permanent contracts, he says, because of the way the asset is booked and because permanent policies have no potential expiration date.
Also, funders need to use permanent insurance for purposes of securitization, he says.
Life expectancy considerations have been a factor, too, Page indicates. To use a level term policy, the term period must be double the life expectancy, he explains. “But most level term contracts run only 10 to 15 years, while most expectancies for settlement cases are 8 years or so. Also, most level term products are not issued to people ages 60-65; they are issued to younger people with longer expectancies,” thus making them unsuitable for traditional settlements.
Now, though, strategies are changing, Page says. Funders are realizing that if a level term policy has a conversion feature, it can be converted to a permanent contract—and then settled.
It is that realization which spawned the budding term-to-conversion settlements market, he says.
It’s not a “rampant” trend right now, says Rob Haynie, managing director of Life Insurance Settlements, Ft. Lauderdale, Fla. But term-to-perm is being mentioned more and more in settlement industry forums and advisors’ meetings, he says. People are realizing that a lot of level term insurance is on the books, much of it involving older convertible policies that are nearing the end of their terms, he says.
Scott Peden, president of Life Partners, Inc., a funder based in Waco, Texas, says his firm saw hardly any of term-to-perm cases before 2007. But this year, he says, “we started seeing these policies presented to us.”
Like Haynie, Peden says term-to-perm settlements do not yet reflect a huge amount of business. “But the business is growing,” he says, noting that the contracts he sees usually involve 10- to 20-year level term policies with large face amounts that are very close to the end of the term and convertible. “The customer is approaching a decision point, whether to keep or convert the policy, terminate or sell.”
Scott Kirby, co-president of Advanced Settlements, Inc., Orlando, Fla., sees a similar pattern: “The contracts tend to be offered just before the end of, say, a 10-year term, and the owner doesn’t need to, can’t afford to, and doesn’t plan to renew it.”
Most insureds in term-to-perm cases are aged 75 to 80, says Peden. By that time in life, it’s too expensive for them to re-enter for, say, another 20-year term. It’s expensive to convert to a permanent contract too, he allows, because permanent policies cost a lot more than term policies. But if the policy is settled, he continues, the cost of the new policy is picked up by the funder as part of the settlement transaction, relieving the seller of that concern.
Advisors should remember that “the cost of the conversion policy is always factored into the funder’s decision of whether to make a settlement offer,” says Peden, cautioning that sometimes the numbers do not favor a transaction.
But even though “the seller has to bear that higher cost in the form of a discount” on the proceeds from the settlement, the seller still ends up with more money than if terminating the contract, Peden adds.
Another advantage for clients is, the underwriting on the original policy carries over to the new conversion policy, says Justin Eriksen, managing director at One Degree, LLC, a Ft. Lauderdale, Fla. premium finance aggregation firm. He works with agents and general agents who do settlements.
Eriksen cites this example: A man who is into year 15 or 16 of a 20-year level term policy comes down with cancer. “The man is now uninsurable from a life underwriting standpoint. But he can now convert to a permanent life policy at the insurer, with the original underwriting.”
The conversion policy will cost more, he allows, but “something is better than nothing, especially if the man has a wife and children, estate tax problems, and other reasons to need coverage. Plus, he can now settle that policy.”
Still another advantage for clients it that they can increase the face amount on the new permanent policy, says Page of Atlanta, This often happens, he says. “But of course, the insurer will look at the face amount for financial appropriateness.”
There are advantages for life insurers too, points out Peden. “From a cash-flow standpoint, the companies that issue converted policies get the higher premiums of the converted policies,” since settled policies almost never lapse.
If a carrier has been using lapse-supported pricing on its conversion policies, that could affect long-term profitability, Peden concedes. But carriers can do things to adjust, such as tweaking rates of newly issued contracts, he adds.
Eriksen suggests advisors consider the following tips as part of their term-to-perm settlement strategy:
• Review conversion features as part of the customer’s annual policy audit. “Help the customer understand the mechanics of what they already own,” he says.
• Analyze the conversion features, so if the client ever wants to terminate a policy, the advisor will be ready to present all available options, including whether term-to-perm settlement is possible, he says.
• Look to place level term cases with insurers offering the most affordable term conversion rates, suggests Eriksen. Those policies will be attractive to funders many years later, and that will increase the odds of securing a good settlement for customers who want to sell their policies. Since consumers are starting to recognize that life insurance is an asset class and that they may want to monetize their policy someday, they will perceive these conversion features as good to have, he adds.
• Keep in mind that the term-to-perm solutions create liquidity opportunities for the customer. Baby boomers are looking for liquidity, Eriksen says, noting that many are tight on cash due to today’s volatile economy. When considering a term policy, some even ask, point blank, “how do I get money from this?” The term-to-perm option gives the advisor an answer.
Some settlement experts call convertible level term policies “sleeping term insurance,” observes Haynie. People, including consumers, are just waking up to its potential, he says.
This awareness started growing as the industry transitioned from offering viaticals to offering life settlements to working with estate planners and financial planners, he says. Then it grew even more as the business has become more transparent and more proactive about communicating with consumers and advisors.
Today, he says, it’s not uncommon for insureds to see ads, hear talk shows and go to seminars on settlements. “They begin thinking, ‘maybe I have convertible term insurance already, so maybe I should look into this.’”
“Financial advisors should incorporate this into the standard part of their business practice, if they have clients with level term policies that are approaching the end of their term,” maintains Page of Atlanta.
It’s not guaranteed that every term-to-perm case will be settled, Page cautions, but “there is a high rate of probability.”
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| | Fri, 03 Oct 2008 15:11:47 GMT | |
This is Part IV of the 4th Life Settlement Roundtable sponsored by National Underwriter Life & Health, the parent publication of Settlement Watch. It is the last segment in the series. Held in Washington, D.C. on May 14, 2008, the 4th Rountable featured life settlement company executives discussing the nuts and bolts of settlement business operations. They identified various process challenges but expressed tremendous confidence in the value of what their firms provide to consumers. The moderator is NU Editor-In-Chief Steve Piontek.
Agents more knowledgeable
MR. PIONTEK: I am curious about your perception of agents over the last 6 months to a year and whether you think they have actually gotten more plugged into this process, whether there is a growing sophistication among agents.
MS. BALSAM: Yes. Yes, we are seeing a growing level. I will say that the process that we started so many years ago with educating. I am also proud to say I started this business educating people kind of by myself on the telephone, educating agents as to the difference between a life settlement and a viatical settlement. “What’s that? A viatical?” "No, it’s a life settlement.”
That being said, those agents who are already participating apparently are actively participating, and they have grown their business. However, there are so many other agents who have kind of an advisory role who have the senior clients who are not in this market space. I know that I see these guys all the time. We are all out there educating people as to the benefits.
MR. PIONTEK: That education, is there a movement afoot in LISA to institutionalize education?
MR. FREEMAN: Yes. Within LISA, there are regional agent seminars and conferences that are going on now. Regional broker seminars. I think you will also find, if you even look beyond LISA that a number of us in our own businesses have educational efforts that we put forth to educate the financial representatives, whoever they may be, whether they are insurance agents, CPAs.
MR. FINFER: We have already gone so far as to get the classes approved for CE credits. That is a big upside for agents to come and listen to you talk about a product that they should know about and get CE credits for it.
But as you can see, this industry is constantly evolving. What I told you six months ago might be a little bit different today. You constantly have to educate.
The nice thing I think is that when you get somebody hooked on this--one agent to get one case done--they will immediately say, “I’ve got to go back to my book because I’ve never made more money and worked less with the outcome in this situation.” They become a life-long agent and understand life settlements even more.
MR. FREEMAN: If you focus on the consumer, the person they helped, too, they have never had a more unique solution to a financial problem that they never had a solution for before.
I think that is really the biggest selling point of the whole life settlement option is that it is an option that solves problems that couldn’t be solved any other way until life settlements came into being.
MR. PIONTEK: From the agent point of view, don’t many agents once they have a client settle a policy, they sell new insurance, don’t they?
MR. FINFER: In some cases, it could be the impetus to review the valuation of the policy, to review that policy as opposed to a 1035 and see if they could increase or provide them with a new product that does the job better. In my business, I’m seeing that 30% of the time.
Wish lists
MR. PIONTEK: We’re getting close to the end of this. If you had a mini wish list of one or maybe two things that you could change to make either the process better for you or better for the business, what would you change?
MR. HAYNIE: Life expectancy reports have slowed down so much, and that’s a problem. That is a big problem right now. I think that is a good problem for the life expectancy companies.
MR. FINFER: I sit on the advisory board of an LE company. You wouldn’t even believe this organization today and where it was 6,7,8 years ago. It is amazing.
Again, they are just going to have to hire more people, but that’s a great problem to have. However, you’re right, you can’t even get a true number for 20 days. It is 20 business days; it’s a month.
MR. FREEMAN: One month.
MR. HAYNIE: God forbid if something happens during that month where a new medical report now comes in and they have already issued a date and then there is a whole other level of problems.
MR. FINFER: It puts us back in the queue.
MR. FREEMAN: Another 30 days, so 60 days just for an LE.
MR. PIONTEK: Anything else?
MS. BALSAM: Securitization, a uniform process.
MR. FINFER: I think from a broker’s perspective, there seems to be a disconnect between the date that you provide a full and complete file and the date that you actually receive a price. As a broker, I spend more time on the phone calling up providers saying, “At least call me back.” I don’t understand it.
MR. FREEMAN: It’s the mechanics of the funding of the business, which is why providers need their own funds. Most providers really don’t have their own funds, so they have to depend on somebody else to agree to a price. That is one of the problems.
MR. HAYNIE: Well, the funding is kind of lumpy. I mean, it’s there sometimes, and it’s not there at other times.
MS. BALSAM: It’s piecemeal.
MR. HAYNIE: Right. That might be difficult to take advantage of.
MR. FINFER: The problem is an agent will call you a hundred times, “I need a price, I need a price, I need a price.” When you finally give them the final price, it’s like, “I’m on a vacation in Europe.” Nobody can sign anything. They don’t know how to make a decision.
That is also very frustrating, very frustrating for us because now we are in the middle of managing the provider’s expectation, and before we were providing the insurance agent the insured’s expectation and we have to flip to the other side.
Now we’ve got to explain to them that we are not trying to BS them. We’re not giving it to somebody else. We just really can’t get this guy to make a decision, and all of a sudden he has brought his daughter into the picture.
MR. FREEMAN: The problem then is when you’ve got money and you’re ready to spend, you’ve got to spend it. Basically, if they wait too long, the offer disappears.
MS. BALSAM: The offer is gone, yes.
MR. HAYNIE: One of the things I would probably say that I would change is when a deal actually goes to paper, an offer, a formal offer, and then that offer goes away, which happens a lot. Really, they kind of pass that down to you and give no real explanation as to why. I’m sure it is a valid reason.
We are seeing a lot of that. I would like to see less of that. In other words, you make a firm commitment, you make the offer. There is really no recourse for you as the broker or for your client to really come back at them. They just pull the offer. Believe me, I’ve been the beneficiary and been the victim.
MR. PIONTEK: Well, I think we have come to the end of the time. I have to say I have really enjoyed this conversation. It has been very stimulating and I think it will really give people, when they read the supplement, an absolutely terrific idea of where the business is now. I thank you all for your contribution.
Note to readers: This concludes the series of articles on the 4th Life Settlements Roundable. But future issues of Settlement Watch will carry new segments of other settlement roundtables as they occur. Stay tuned.
Following is a list of participants in the 4th Settlement Roundtable:
Jordana Balsam Principal Balsam Settlement Management, LLC New York, N.Y. www.Balsamsm.com
David Wright Vice President, Marketing Rumson Capital, LP Jenkintown, Pa. www.rumsoncap.com
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| | Fri, 03 Oct 2008 15:00:03 GMT | |
The question was: Several of my older clients have been adversely affected by the recent market downturn. Should I suggest a life settlement as a way for them to gain some needed liquidity?
The answer is: While nobody can accurately predict how the world will look once the dust settles from recent and current (and maybe most importantly) future events such as rescues, bailouts, mergers, etc., one thing is certain.
That one certainty is: the world as we knew it will be gone and people, now more than ever, will need to reexamine their financial holdings and their comprehensive estate planning to determine what products they need in terms of their individual financial goals and asset protection going forward.
Life insurance will certainly be one of those items that needs to be examined to see if what they currently have in place is needed or in fact, could be replaced with a far superior and much more economical product that achieves the desired result.
Our service, in the life settlement industry, will continue to be free non-binding appraisal of an asset that may turn out to be more attractive than ever to the capital markets. The mere fact that it will remain an uncorrelated asset will remain attractive to existing players and even bring new players to our marketplace.
We all knew downturn was coming (much like a hurricane that is approaching the shoreline). We just didn't know the specifics of what the aftermath would look like—and might not still for some time.
As far as suggesting a life settlement as an option to get some liquidity, the marketplace is here today and I expect once our Congress passes an acceptable "bailout" and banks begin to lend to one another again, there will be nothing but a bright future for the secondary marketplace.
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| | Fri, 03 Oct 2008 15:54:25 GMT | |
The question was: Despite growing interest in settling policies held by insureds younger than age 65, the target age group for settlements is still ages 65-70 and up. In 1995, this age group represented approximately 12.8% of the U.S population, according to the Census Bureau. Roughly what proportion of the U.S. population is this age group expected to represent by year 2025?
a) 10%
b) 12%
c) 15%
d) 18%
e) 21%
The answer is: d) people age 65 and up, the target market for most life settlements, will represent roughly 18.5% of the U.S. population by year 2025, according to data from a Census Bureau projection made in 1996. Many demographers describe this segment of the population as the fastest-growing age group.
Here are the projections from the Census Bureau:
Table K. Percent Distribution of the Population by Age
and Region: 1995, 2010, and 2025
Year and Under 20 20-64 65 years +
region Totals years years
1995 -------- -------- -------- --------
United States 100.0 28.8 58.4 12.8
Northeast 100.0 26.9 58.9 14.2
Midwest 100.0 29.0 57.9 13.1
South 100.0 28.8 58.5 12.7
West 100.0 30.4 58.3 11.3
2010
United States 100.0 27.4 59.4 13.2
Northeast 100.0 26.2 60.1 13.7
Midwest 100.0 26.9 59.5 13.6
South 100.0 26.6 59.6 13.8
West 100.0 29.8 58.5 11.7
2025
United States 100.0 26.8 54.7 18.5
Northeast 100.0 25.8 56.0 18.2
Midwest 100.0 26.1 54.8 19.1
South 100.0 25.3 54.7 20.0
West 100.0 29.9 54.0 16.1
Source: U.S. Bureau of the Census, Population Division, PPL-47, table 4. see it here
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| | Tue, 02 Sep 2008 20:14:22 GMT | |
This is Part III of the 4th Life Settlement Roundtable sponsored by National Underwriter Life & Health, the parent publication of Settlement Watch. Held in Washington, D.C. on May 14, 2008, the session featured life settlement company executives discussing the nuts and bolts of settlement business operations. They identified various process challenges but expressed tremendous confidence in the value of what their firms provide to consumers. Upcoming issues of Settlement Watch will carry more segments of this intriguing roundtable. The moderator is NU Editor-In-Chief Steve Piontek.
What companies are doing
MR. PIONTEK: Let’s talk a little bit about what some of the companies are doing in terms of co-opting what you do or trying to co-opt what you do. We have life insurers actually getting into the settlement business, Transamerica and Phoenix.
We have companies that are tailoring policies so that settling them will become less advantageous. New York Life just came out, I think, with a policy where if you want to sell the policy, they will give you more than the cash value. I think that this will be a major change as more and more companies get on board with this kind of activity. Any comments about that?
MS. BALSAM: It is wonderful. I think that products that are competing with life settlements are not only coming from insurance companies; they are coming from Wall Street too. It is giving us, the brokers, the opportunity to add more value to our clients by giving them more options.
There are innovative new products that are coming onto the marketplace for seniors that are giving them options, and we are advisors of them. As a result of the marketplace, there are more outlets for us.
MR. PIONTEK: I have to say, this is kind of a unique attribute of the settlement business, at least as it is articulated, “We love competition. Bring them in. We don’t care how many more players enter the business” is something that has been said over and over and over again.
MR. HAYNIE: I can’t do it all, and he can’t do it all.
MR. FINFER: It is consumer-friendly, too. It only drives up the price.
MR. HAYNIE: It legitimizes what we do.
MR. FINFER: It is free advertising. I think we’ve got them--if you can’t beat them, join them. I think the companies have finally realized that we are here to stay for the long term. They have to understand our market placement and adapt to it.
MR. FREEMAN: Well, when they all get in, they will all go change the STOLI laws.
(General laughter.)
MR. HAYNIE: I think Transamerica is going to be surprised trying to do business on the Exchange the way they are. It’s easy to hold an auction and get items to auction off, but having the actual money show up in the room to buy the items is a much different story. That is what we are seeing on the exchanges right now is it’s not the real money that is coming to buy product on the exchange.
MR. FINFER: For the exchange to be successful, for anybody that has ever used an exchange, you cannot take out the human element of explaining to a high net-worth senior exactly what it is that they are doing along with their two kids and the attorney. An exchange doesn’t provide that value.
It also doesn’t put in the necessary piece until Rob calls seven different funders to try to get the best possible price. An exchange can’t add that personal touch and then come back to the client and explain to them why this is the best possible offer and what can be done.
MS. BALSAM: An exchange can’t offer the expertise that we do. With all these new products that are entering the marketplace, they are multifaceted; they are very complicated. You can’t get that from an exchange.
MR. HAYNIE: We don’t want to beat the exchange. We all hold auctions. I mean, that’s just what we do, whether it looks fancy or on a computer with deadlines, drop-dead dates, timeouts, or whatever you want to call it.
The one thing that is important about all auctions is you have to make them available to everybody that can potentially buy, or you’re not doing your job. You can’t just go, “Well, I don’t like that company, so I’m not going to send it to them.”
A lot of the exchanges and a lot of the program platforms don’t go to everybody. Unfortunately, you’re leaving money on the table for your client.
MR. FREEMAN: Not only that, but people have licensing problems. Not everybody can buy everything everywhere.
MR. HAYNIE: It is kind of like a very complicated board game you play every day. We talked a little bit about, where is the trust? Where is the beneficiary? Where do they pay their taxes? These are things you’ve got to know.
Choice of product
MR. PIONTEK: I’m just thinking about agents who might not know too much about this and wondering, “Well, are any products better for settlements, any type of life insurance better than others? Is universal life better than whole life? Do they have pluses and minuses? What do you look for?”
MR. FREEMAN: Very little whole life is purchased. The old kind of fixed-premium whole life, there is not much of that purchased.
Now, universal life, as you know, is a whole life product. It is just a flexible or adjustable face amount product. Frankly, those products are the most sold now, and they allow us to optimize premiums so that we can optimize the returns in the investment.
Frankly, whole life products don’t allow us to do that.
MR. PIONTEK: What about variable life? Are there particular problems with that product?
MR. FREEMAN: It presents some problems that are unique to it, especially if you’ve got the subaccounts funded. If you find the cash value in a subaccount or put the cash value in a subaccount, it is a security.
Then, you’ve got issues around its being sold to you as a buyer. If you are a buyer, how do you sell it, if you wish to do that? There are a couple of different issues.
I think a lot of people have looked at that and made their own decision about whether they will buy variable life policies or not. Maybe the brokers actually know more about how many people are buying those than I do.
MR. WRIGHT: We see very few variable policies. They are sold under a different selling process when the agent goes to the client. Some of them aren’t even intended for the death benefit to be the real benefit of the product.
MR. FINFER: I think what we are seeing are predominantly the cases that are best to bring to the market are universal life policies. You are seeing face changes and other changes here.
What you are seeing is UL policies in excess of $500,000 or more, and you are seeing a convertible term converted to a universal life product as being the easiest to bring to market.
You are seeing people walking away from smaller faces because of the amount of time and energy and dollars that are having to be put into life expectancies is too expensive a process for everybody involved in smaller policies.
Small-face policies
MR. PIONTEK: Well, let me ask you this. If life settlements are so pro-consumer, don’t you think it is incumbent on the business to find a way to have smaller face policy owners have access to the settlement?
MS. BALSAM: Sure. It’s happening now.
MR. HAYNIE: Well, there is definitely a home for that, and the cost remains the same. To service it from the buyer’s perspective the way they do, I have been listed as an individual that they need to keep in touch with on a regular basis.
I get letters almost daily and telephone calls to service that small policy. Just like any business, you know the bigger the service, the more money you can make. In some cases, it is just not profitable. Especially if you have a $50,000 or a $100,000 face amount, it is just not profitable.
MR. FREEMAN: I know that a lot of people have come out with pronouncements in the last few years to buy small policies. For the record, I would like to let you know Habersham Funding would always buy small policies and still does; so for us, it is not a new thing. I didn’t mean to give an advertisement.
(General laughter.)
MR. PIONTEK: The rap on insurance companies is they just want to sell big policies to wealthy people, and the middle market is being ignored. I think statistics would bear that out.
It seems to me you guys run into a contradiction if you say, “This is a great consumer benefit, but you really need a half a million dollar policy to avail yourself of it. Because otherwise, it just doesn’t make sense for us."
MR. FREEMAN: Well, one of the problems that the insurance companies have, in their defense, is when they face trying to price policies that are smaller at a different price point than they do policies that are larger, they then have regulators put together panels.
They had one called the Small-Face Committee where they want to tell them to charge the same thing that they are charging for a $1 million or $2 million or $10 million policy.
Well, they can’t do it. They would go broke. These people are not charitable institutions that have contributions to keep them afloat. They actually have to make money.
This is one of the problems in the real world is you actually do, if you have overhead and employees who expect to eat, have to make money. Whether you are a life insurance company issuing small policies or whether you are a life settlement company buying small policies, you have to make money.
MR. HAYNIE: I think the same thing could be said for money managers today. If you talk to any money manager, they have a limit of how low an amount of net worth you can have in order to manage your money.
The amount of time you’re going to put into managing your money is the same amount of time they are going to put into managing somebody’s with a higher net worth. There is again a time limit involved and the value of their time doing that.
MR. PIONTEK: By the same token, though, if you look at 10 years ago what money managers would take and what some of them will take now in terms of managing an account, that amount has gone way down. It has gone down to the point that 10 years ago it may not have been profitable, but somebody has found a way to make it profitable.
I guess what I’m asking is do you think somebody is going to find a way to make settling smaller face profitable? By smaller I’m talking maybe $100,000.
MR. HAYNIE: Absolutely, because it’s already happened.
MR. FREEMAN: It’s happening, but it’s not happening as fast as you might think.
MR. HAYNIE: The elephant guns are out because the guys are all looking for the big cases. When we first were in the business, the average was $60,000, and it worked, but it was a different class of capital, too.
They were individual investors, and they were those who could buy those types of deals. Now you’re going to see they are going to try to streamline underwriting to make the process go quicker, but the LE is still $250 whether it is a $25,000 policy or $1 million.
MS. BALSAM: There was talk, I didn’t see it come to fruition, about new LEs needed for these smaller faces.
MR. HAYNIE: Oh, absolutely, no question.
MS. BALSAM: If that still is effective, and again it hasn’t really taken effect, if that actually comes to fruition, then that could work even more so. That would add to an influx of these smaller face policies.
MR. WRIGHT: Well, there are more of them than any other policy. Your clients would be getting more money than the cash value of the policy. However, would they really be getting fair market value, if we’re not spending the same amount of resources analyzing those policies as we are analyzing the million-dollar policies?
MR. FREEMAN: Well, no, they do because the fair market value as a percentage is not the same. Well, you take the same LE and you look at a $1 million policy and if it is worth 40%, then you take a $50,000 policy and it’s worth 18%, I mean, it is just economics. It’s pretty black and white.
You can spreadsheet that.
We have our own underwriting team in our office and have had for the last 5 years, so we do LEs. I think that some companies are doing that now. We have been doing it because we thought that this was a trend a long time ago to have a vertically integrated business that looks similar to an insurance company.
It’s taken 5 years to actually have people in the financial community look at that and say, “Oh, yeah, you know that’s forward thinking.” But that is beginning to happen.
MR. HAYNIE: Baby steps. It’s happening. Somebody is already here. Will there be more people? Now we’ve got to let the education process catch up. Again, there are people out there that have $2 million policies that don’t know they can sell.
MR. WRIGHT: The small-face policies were purchased for different reasons than the larger-face policies. So many more of the large-face policies have outlived their usefulness because of the state tax law changes and because of the decline in wealth in some of our wealthiest people in America. Most of these $300,000 and $400,000 death-benefit policies were truly purchased for the death benefit.
Lumpy process
MR. PIONTEK: One of the things we touched on before and at previous roundtables was how kind of lumpy the settling process is. It is not smooth like a mousse.
I am just wondering, say, in the last 6 months have you seen streamlining in any particular facet of the business, any facet of the business where it has gotten easier to do business or is there not much progress on that front?
MS. BALSAM: Let’s go back to the discussion we just had about the role of the intermediary, the role of the broker. I think we can all attest to our war stories of how complicated this process is, how unstreamlined.
Yes, if it was that easy, 3 steps and you’re done, everyone would be doing it and you wouldn’t necessarily have to offer expertise or offer the advisory role we do.
It is so complicated due to the fact that we talked about an hour and a half ago--the due diligence funders are requiring now with the credit crunch.
The credit crunch happened, the biggest credit crunch in United States’ history. Bear Stearns was a major player in the life settlements industry, and we all know the story there. A lot of due diligence is going on because of the credit crunch. Due diligence leads to complication, a paper-intensive complicated process.
MR. HAYNIE: I would say it is worse than it has ever been before. As a broker, you have to utilize outside resources in order to present it to a provider.
We have absolutely no control, never had control of the life-expectancy underwriting team. I’m running 20 days, I’m running 25 days, I’m running 30 days while you have a client screaming at you, “How come you can’t get a price to me?”
At the same time, we have really in some cases non-responsive carriers not willing to run the illustration that we need or the verification of coverage that we need.
A lot of people have an expectation that this is going to be a 30- day process. They are unrealistic because in this business time is what gives you the biggest price. If it is done right, it is more of a 4-month process.
MR. FREEMAN: Well, unfortunately, in the law in many states if you send for a certain form, they have 30 days. If you send for a change of ownership, that gives them another 30 days.
Just within the insurance carriers themselves, getting the information and getting the changes, it is 60 days. There are 60 days that go by, forget everything else.
It is going to be longer even in small policies, and this is one of the problems with small policies, you have to look at the ownership of a small policy the same way you do a large policy.
In either one of those size policies, that person could be divorced. He could be encumbered. You have to look. That makes it very lumpy, it makes it slow, and it draws the process out.
MR. PIONTEK: It makes life interesting.
MR. FREEMAN: I guess we could do subprime settlements so that we didn’t look at all that, but then we would probably have the same problems that they already have.
(General laughter.)
Reminder: You will be able to read more segments from the 4th roundtable in upcoming issues of Settlement Watch.
Following is a list of participants in the Settlement Roundtable:
Jordana Balsam Principal Balsam Settlement Management, LLC New York, N.Y. www.Balsamsm.com
David Wright Vice President, Marketing Rumson Capital, LP Jenkintown, Pa. www.rumsoncap.com
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