The nascent life settlement industry is at that awkward stage. Not even
a decade old, it's breaking out in new ways of doing business. It's
coping with unpleasant realities like the credit crunch. It's trying to
transition from Mom-and-Pop enterprises operating in a Wild West
atmosphere to a legitimate, institutional business that wealth advisors
should work with on behalf of clients.
In a life settlement, the insured sells his or her policy to a buyer-cum-investor who takes over the premium payments and collects the death benefit. Perhaps the seller is replacing the contract with superior coverage, posits Jordan. Maybe its original purpose, such as estate planning, no longer exists. Regardless, in the past, an insured's only option, other than to let the policy lapse, was to surrender it for cash value.
But that's a mere five cents on the policy-face-value dollar, according to the Life Insurance Settlement Association, the industry's big-tent trade group. In contrast, policies fetch four to six times that in today's life settlement secondary market. So advisors who ignore the arena aren't doing their best for clients.
The real issue is knowing where to turn in this rapidly-evolving marketplace. The LISA Web site, www.lisassociation.org, lists among its members 38 providers, or companies that buy policies for investors and sometimes their own account, as well as 58 brokers that can connect you to them. Another useful roster of names resides at www.livesettlements.net (scroll to the bottom of the screen). But before you can wisely choose with whom to work, some perspective is necessary.
How We Got Here
The life settlement industry is the legatee of the viatical settlements business, which arose in the early '90s to buy policies from AIDS patients who wanted cash during their lifetime. It even inherited the trade association; LISA dropped "viatical" from its name circa 2004.
The young industry has been a little devil at times. Controversial behavior has drawn high-profile lawsuits such as the one TV personality Larry King brought last fall against an East Coast agent. "Many perceive the industry as sleazy," deadpans one well-known financial-services market researcher.
But good might yet triumph. Dubious conduct may have unwittingly sown the seeds of its own destruction. It wrought the need for greater professionalism and created opportunities to improve marketplace efficiency. That has attracted newcomers who are raising the bar for everyone in the game.
"You're seeing more market entrants who want to play 100% by the book," observes Nate Evans, president and CEO of one of the very largest providers, Maple Life Financial in Bethesda, Md. "Similar to other emerging asset classes, life-settlement transactions were initially opaque, at best. Now there is a push towards the transparency and solid business practices that you would expect from a mature marketplace," Evans says.
Much of this trend owes to the appetite Wall Street has acquired for life settlements over the past year or so. A trade group formed by and for large institutions in early 2007, the Institutional Life Markets Association (www.lifemarketsassociation.org), aims to develop industry best practices. Experts say that houses such as Goldman Sachs and Credit Suisse represent much of the money behind, and increased impetus for professionalism in, the business right now.