GWG Holdings Inc. is offering investors the chance to partake in the growing and relatively new life insurance settlement market.
The firm, located in Minneapolis, is offering $250 million in secured renewable debentures and up to 9.5% interest on seven-year investments.
GWG buys life insurance policies that the holders no longer want or need for a cash payment to the holder. It then makes the payments on the policies until the death of the insured and collects the benefits upon his or her death. The downside is that the heirs of the original policyholder cannot collect the benefits. The upside is that the policyholder receives money that may be needed for other expenses and he or she no longer has to make the premium payments.
"We offer an alternative to seniors who may not realize they have this option," said Jason Plucinak, key account manager for GWG. "Researchers estimate that 90% of all life insurance policies lapse or are surrendered for nothing. We give the holder a lump sum payment that can be used for anything the person wants."
The policy is not sold unless the beneficiaries, as well as the policyholder, agree. The price paid depends on the policy value, the age of the holder and the premiums that have to be paid.
"People do not realize a $1 million policy can cost a 75-year-old person $30,000 or $40,000 a year. If we can pay them $250,000, that money can allow them to do a lot of things," Plucinak said.
GWG was created in 2006 and now holds policies with a face value of $482 million. It has raised about $100 million in bonds. It now hopes to raise an additional $250 million by selling renewable secured debentures and will offer more once it reaches that $250 million goal. A minimum investment of $25,000 is required. The bonds can be purchased with maturity dates ranging from six months to seven years and are renewable upon maturity.
Interest rates range from 4.75% to 9.5%, depending upon the length of time the bond is held, and interest can be paid monthly or annually. There is a 6% fee for withdrawing the investment before the maturity date unless it is due to the disability, bankruptcy or death of the investor.
The secondary market in life insurance policies is relatively new, although the market is maturing and is now a regulated transaction in more than 40 states, said Mark Micek, GWG director of sales and marketing. The right of a policyholder to sell a life insurance policy was determined by the U.S. Supreme Court in 1911.
The life settlement business began to emerge around 2000 as an outgrowth of the viatical settlement business, which specializes in buying the insurance of terminally ill policyholders, according to a 2002 study by the Wharton School of the University of Pennsylvania. Life settlement companies typically purchase policies from people who are over 65 years old, who have experienced a decline in health and who have a life expectancy of between six and 12 years, the study found.
The study also concluded that, as of 2002, the life settlement industry was benefiting policyholders by about $240 million a year.
The opportunity to sell life insurance policies in a way that the buyer can still make a profit for investors came about because of pricing changes in the insurance industry over the decades, said Paul A. Siegert, GWG president and chairman. Siegert is active in the insurance financing industry and is vice chairman of the Life Insurance Settlement Association.
The change to universal life policies that start with lower premiums, but step up the premiums as the person ages, encouraged the reselling of the policies.
GWG is using this change to try to create wealth on several fronts, according to GWG CEO Jon R. Sabes, who previously served as CEO of Opportunity Finances LLC, a family investment company specializing in structured finance. He also co-founded and developed two insurance related finance companies: GWG Life, a company in the life insurance finance industry, and MedFinance, a casualty insurance and health-care finance company.
GWG can pay insurance policyholders five to 10 times more for their policies than they would get by surrendering them. In turn, GWG can redeem the policies when the insured dies and make money for shareholders and the company, Sabes says.
"Our mission is to finance and manage a large portfolio of life insurance policies so that it is a profitable enterprise and also so it brings about positive social change by paying the policyholders money they can use during their lifetimes," Sabes said.
Some states have begun to require that a policyholder be notified of the right to sell the policy on the secondary market before the policy lapses or is surrendered for what may be a lesser amount of money than can be received by reselling the policy. For regulatory reasons, GWG does not buy any policies less than two years old or where the insured is terminally ill.
Fees for the sale can be high, with a sales commission of 4.25%, a dealer manager fee of 1%, depending on the terms of the debenture, according to the company's prospectus. Risks are also associated with the sale for a number reasons, including the fact that the secondary life insurance market is relatively new and that GWG does not have a long history.
Investors should also note that the price GWG pays for policies are partly based on subjective assumptions that could turn out not to be true, according to the prospectus.
Only investors who do not require immediate liquidity should invest in renewable secured debentures. No public trading is available for debentures so there is no way to resell the bonds. Investors also should be aware the health of the insurance company and the development of new regulations in this relatively new market could affect the investment, the GWG marketing material warns.
-Karen DeMasters