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Betty's Corner


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Life Settlement Market - Lack of Policies, Lack of Capital or "Something Else"?

lisainstitute.org
By: Darwin Bayston, CFA, President and CEO, LISA

The life settlement market, following a contraction that was fueled by the global economic crisis and some market-specific issues (such as life expectancy evaluations) is poised for a rebound. A growing number of life settlement providers are again competing with one another for policies and the market as a whole is expanding its appetite for small-face policies. In addition, a number of institutional investors are either poking around in, or have put a small toe in the waters of the life settlement market.

But this comeback has been slow. Perhaps slower than some have hoped for or expected.

Is the reason for the slow resurgence of the life settlement market a lack of policies or a lack of capital? Or is it something else? Let's go with the "something else."

The potential size of the life settlement market, in terms of face amount of life policies purchased by investors, is large. At least three independent analyses have concluded that the market for life insurance policies available to become the subject of a life settlement ranges from $100-$160 billion in face amount of life insurance.

  • Bernstein Research (2006) - $160 billion
  • Conning Research (2012) - $136 billion Ave Net 2012-2021
  • Bergstrom-Hart (2012) - $102 billion

My own analysis, based on 2011 data available on life insurance owned by seniors age 65 or older, supports these figures. I have concluded that the potential market for life settlements is approximately $144 billion in available death benefits, with more than $66 billion, or almost 46 percent, owned by seniors age 75 or older.

So, the issue is not a lack of policies available for a life settlement. Millions of seniors who are in need of retirement income, or are facing unanticipated long-term care costs, hold tens of billions of dollars of life insurance policies that could be converted through a life settlement into cash to meet those important needs.

Two years ago, the consensus was that the life settlement market suffered from a lack of capital. The aftermath of the 2008 financial meltdown, negative press, life expectancy extensions and lawsuits among investors and insurers had given pause to new capital entering the market.

Conning Research has written reports about the life settlement market since 1999, annually since 2006. In their 2012 Report, Conning did express that the fundamental appeal of life settlements remains for both consumers and investors, but that the challenge for the industry remains attracting capital to buy new policies. They further suggested that the life settlement market may remain a smaller niche marketplace than originally thought.

Very recently, I have spoken to two well-known institutional investors that have been considering committing a total of more than $1 billion of investment funds to the life settlement space. Independently, these investors have expressed hesitation about such investments based primarily on the inability of the life settlement providers they have met with to confidently express their plans and capabilities to accumulate a significant portfolio of quality policies in a reasonable period of time.

Professor Lauren Cohen, Harvard Business School, has authored a Case Study about the life settlement market that will be available in the near future. The case will be taught to the students in Professor Cohen's MBA Investment Strategies class in October, as well as next year at the renowned CFA Investment Management Workshop. The case study will bring significant positive attention and credibility among institutional investors.

The combination of the potential of a large market of policies and institutional investor acceptance of life settlements as a credible competitive investment alternative suggests the issue is neither a lack of policies nor a lack of capital.

Then what is this "something else"? Awareness and education!

The life settlement market and its member organization, the Life Insurance Settlement Association, have simply not mastered the art of marketing, informing, educating, and selling the rights and benefits a life settlement option offers to the public - to the millions of senior life insurance policyholders and their adult children, as well as financial advisors and counselors (financial planners, CPAs, elder care attorneys and insurance agents), and the media. It is that simple.

A small number of LISA member firms, for example the Lifeline Program, have devoted significant time and resources to provide greater awareness and understanding of the benefits of a life settlement option to the senior population, their advisors, and the press. Coventry, for years, operated the Coventry Center for Education, providing education (and CE credits) to thousands of insurance producers and financial advisors, before gifting the Center to LISA where we have been updating and expanding the course offerings.

Individually, these companies and others are achieving recognition and success. However, expanding the market significantly begs the participation and commitment of the Life Insurance Settlement Association and the industry at large. We need to be innovative, present and persistent.

In 2010, the Insurance Studies Institute (ISI) conducted an analysis of consumer decision-making behavior affecting the purchase and ownership of life insurance. Seniors over age 65 were surveyed as well as personal interviews conducted. Among the results:

  • 40% have lapsed or terminated a policy
  • 60% expressed concern their savings and net worth would not sustain them during retirement
  • 50% are not aware they may sell their policy, those who do are skeptical due to insurance industry negative messaging and negative press
  • 90% who lapsed a policy would have considered a life settlement had they been aware of the possibility

Another astonishing finding: 49% of financial advisors lack knowledge about a life settlement, therefore do not recommend the option.

Clearly, the issue is one of awareness and education, or lack thereof. The life settlement market is capable of creating its own resurgence and significantly growing itself.

The speed and height of the recovery and growth will depend on a commitment by the market leaders, the Life Insurance Settlement Association and individuals to a well-defined and dedicated awareness and education program of marketing and selling to seniors!

Here is one thing that LISA is doing for its members at the upcoming Annual Meeting. Mr. Jim Gilmartin, founder of Coming of Age and noted expert with 20+ years of experience marketing to seniors and baby boomers will be a featured speaker at LISA's 19th Fall Conference October 10 in Orlando. Jim will discuss approaches and tactics that work and provide recommendations we can do NOW. In addition, Scott Page, founder of the Lifeline Program will share his firm's experience in awareness and marketing to seniors. Scott appears regularly on the Fox Business News program, Varney and Company.


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