Resurgence ahead for life settlements industry?

Underfunded universal life policies' loss may be a gain for secondary insurance market

Dec 16, 2013 @ 2:09 pm

By Darla Mercado

Universal life insurance, life settlements
+ Zoom

The underfunding crisis that's facing a swath of life insurance policies that were written in the 1980s and 90s could bode well for the life settlements industry — the secondary market for life insurance.

Financial advisers, attorneys and trustees are struggling with universal life insurance policies that were written decades ago using optimistic assumptions for interest rates at time when they were as high as 15%. UL policies provide not only a death benefit, but also a cash value account that's credited interest and that clients can fund with a portion of premium dollars. Costs of insurance are deducted from the cash value.

High-interest-rate assumptions back then meant that the people who bought these policies didn't expect to pay a lot to cover the cost of the policy. They thought that the high credited rates of interest would help cover that expense.

However, in today's low interest rate environment, carriers are unable to credit interest at those high rates. Customers are now deciding whether they should pay more money to keep the policy in force, cut their death benefits or let the policy lapse altogether.

A fourth option also is emerging: Sell the underfunded life insurance policy to an investor via a life settlement.

The life settlement market allows investors to buy an unwanted life insurance policy from an insured person, who gets cash up front — an amount that's less than the death benefit of the policy — while the investor becomes responsible for paying the premiums. At the end, the investor collects the death benefit when the insured person dies.

“This is an opportunity to leverage a disaster,” said William Scott Page, president of The Lifeline Program, a life settlement provider. He noted that the company has had an uptick in appraisal requests for universal life insurance policies.

Larry J. Rybka, chief executive of ValMark Securities Inc., a broker-dealer that also has a life settlements operation, says that they have 20 policies that are going to market this year, worth $65 million in face amount, up from 10 that were sold last year.

He noted that there likely are other factors into clients' renewed interest in offloading unwanted policies. For instance, the estate tax exemption for couples is up to $10.5 million, meaning there are clients who bought policies in the past, believing they would need large amounts of coverage to address estate taxes.

“With [interest] rates down, these clients are pressed to maintain a lifestyle in retirement,” Mr. Rybka said. “With the specter of having to pay more premiums, they now want to give up the policy.”

He notes, however, that wrapping up a life settlement transaction is hardly a speedy process; it can take at least three months.

Not everyone anticipates a massive flood of abandoned underfunded life insurance policies to hit the secondary markets, however. Lori Skibo, national sales director at Rita Robbins & Associates, notes that selling a policy to an investor is not easy feat — and policies on the verge of collapse probably won't seem very attractive.

“If the contract is truly underfunded and the buyer has to dump a ton of money to bring it up, then it might not be a profitable sale to the life settlements company,” she said.

Ms. Skibo, who has worked in the life settlements industry, added that buyers are especially picky about the policies they choose to purchase. “For every 100 applications that would come in, there may have been 10 to 15 that are viable transactions, and of that, only half would come to fruition and be settled,” she said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

INTV

Mercer's Cara Williams: How to achieve gender parity in the financial advice industry

The financial advice industry can learn from companies and countries that are well on their way to achieving 50/50 gender parity, according to Cara Williams, global wealth leader for the multinational client group at Mercer.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print