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Betty's Corner

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Life Settlement Industry Approaching Recovery

What a difference a year makes. During fall 2009, many analysts were writing off the life insurance settlement industry, suggesting a perfect financial storm had ended a 20-plus-year run of companies buying insurance policies from seniors and patients facing terminal illnesses. Fast forward to the last quarter of 2010, and the situation has completely turned around. The storm clouds have passed, and the industry appears to be on the cusp of another surge in growth.

For certain, the recession hit the life settlement industry hard. As credit markets froze in 2008, institutional investors pulled back, and investment capital was suddenly in short supply. At the same time, a broad change in life expectancy underwriting tables lowered policy offering prices across the board, further spooking investors and leaving policy sellers uninspired. Adding to the storm, regulators were cracking down on "stranger-originated life insurance" (STOLI) policies, which had been sold in large numbers during previous years. All of these factors stifled the life settlement market and led some to believe the industry would never recover.

Perhaps a return to the sales levels of the high-octane, STOLI-fueled days of previous years are a ways off, but the industry is healthy once again. New capital has been flowing in for most of the year, and provider companies are buying policies and creating portfolios that are catching the attention of Wall Street heavyweights.

Most importantly, agents and broker-dealers are returning to the market after a period of low confidence. As the market was adversely reacting to the financial crisis, many agents saw offers pulled and felt betrayed by the industry. As it turned out, the life settlement industry, like many other parts of the U.S. economy, had grown too dependent on credit. When lines were shortened, many providers were unable to see offers through to agents and broker-dealers. Fortunately, providers have spent the past 12 months rebuilding many of their relationships with banks as well as agent groups, and the crisis of confidence has largely abated.

Market correction

The credit crisis and the recession, though extremely difficult for the industry, may in the long run have some beneficial effects.

Shakeout of fly-by-nighters: For a period of time a few years ago, it seemed like everyone was jumping into the industry to try to make a quick buck. The manufactured policy craze was in full force, and a number of questionable operators were muddying the waters. As a byproduct of the credit crisis, many of these "fly-by-nighters" exited the scene when the going got tough. We now have a core community of providers and brokers who are in the industry for the right reasons and with the right expectations.

Demand for stock market alternatives: The leaders of the life settlement industry for years have preached that life settlements are not correlated to the stock market. While the broad economic meltdown dragged our industry down with it, it is still quite clear that the economic fundamentals behind life settlements have little to do with the S&P 500 or the Dow Jones Industrial Average.

Life settlements remain a viable alternative to traditional stock market risk, and this is a key reason why institutional capital is returning. At the same time, it is quite possible that individuals who lost part of their retirement savings during the recession will be more open than ever to the idea of cashing-in their life insurance and pursuing life settlements as part of their plan to fund retirement.

Alignment of capital: Life settlements are in a unique investment category, and institutional funders are better served when they understand this category and what makes it different. Capital sources that didn't have a long-haul approach were not a match for the industry, and the recession largely shook out this group as well. We have learned that the capital sources and the provider companies they fund/partner with need to have well-aligned goals, or success will be limited.

The wave is coming

Looking ahead, the fundamentals behind the life settlement industry remain solid. Sophisticated agents and financial advisors are taking advantage of the new opportunities in the marketplace, and growing awareness among seniors should continue to drive the market. Sadly, we are also seeing an influx of policies from seniors facing insolvency issues. Savvy court-appointed receivers are selling policies of seniors facing bankruptcy. In some cases, it is possible such bankruptcies could have been averted or at least delayed had the policyholders known about life settlements.

From a macro perspective, the marketplace has yet to feel the full impact of the baby-boom generation. More than 76 million American children were born between 1945 and 1964, and today there are more than 112 million people over the age of 45. According to senior Web community ThirdAge.com, baby boomers control over 80% of personal financial assets and more than 50% of discretionary spending power. They are responsible for more than half of all consumer spending, which is projected to increase $800 billion to over $4.6 trillion by 2015. This group also comprises the highest-earning, best-educated and largest home-owning group. And they are getting ready to retire.

The wave is coming, and the settlement industry will ride it - this is not an "if" but rather a "when" situation. Agents and broker-dealers who aren't on board to meet the needs of boomers will miss out on a once-in-lifetime market blitz.

So-called Golden Boomers, baby boomers who are retired or will soon retire, are making up a growing part of the population. The "Era of the Golden Boomers" is said to officially begin Jan. 1, 2011. With this ongoing shift in the population, life settlements will only grow in popularity and utility. Many boomers have had to delay retirement because of the financial crisis and are looking for alternative ways to fund their retirement lifestyle. And, of course, a significant number of them have life insurance policies in place.

The desire to retire actively and overall "can-do" attitude of boomers make a perfect match for the life settlement industry. Seniors are no longer interested in a sedentary retirement. The boomer generation has traveled more, spent more and explored life more than any other group in history. No demographer in the country believes this generation will retire meekly. Cashing in life insurance to spend in the short term - either for fun or financial reasons - will be a characteristic of retirement for the next 20 years.

With the fundamentals solidly in place and the industry's financial house in good order, the life settlement industry is again on the edge of a major surge in growth. Time has healed the recessionary wounds, and the future is bright.

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