To many people, there's something ghoulish about life settlements agreements: Selling your life insurance policy to a third party to wring more cash out and beat the surrender value is a practice that automatically brings up ethical questions. Who buys the policy? And how comfortable are you with the fact that they now have a vested interest in your death? The most common nightmare scenario, of course, is that your policy could be sold to a hit man. If not that, then maybe you'll get fleeced by the strange kabuki pricing, critics say. Others feel the unregulated, Wild West feel of the life settlement market is ripe for all sorts of fraud and unscrupulous business practices, some say.

A relatively young industry, the life settlement world recently blinked in the glare of the media spotlight after TV talk-show host Larry King sued Maryland-based Meltzer Group, alleging that he was hoodwinked into a bad life settlement deal, one in which he would buy a $10 million life insurance policy and immediately flip it for the dough. Advocates of life settlement products say that this sort of scheme is but a poor, estranged relation to the better deals out there.

If that were not enough, the predatory sales nature of the business also makes people livid. Some planners and consultants depict a loose cannon industry where salesmen are taking clients out to dinners and on yachts, aggressively trying to close deals that they say in 95% of the cases shouldn't be done.

It's a bit of an embarrassment to advocates, including one of the industry's pioneers, Alan Buerger, the CEO and chairman of life settlement broker Coventry First LLC in Fort Washington, Pa. Even he says that keeping one's life insurance policy is often the better bet.

"One of the things I believe because of my background in insurance is that people should not surrender their policies-they should keep them," he says. "It's a very good investment for the owners of the policy." But, he adds, "If they have decided for whatever reason they will not keep it, we offer far more value [than a policy's surrender amount]."

He says that his company has paid out in excess of $2 billion for old insurance policies, more than three times what the insurance companies would have paid in surrender value for those same pieces of paper.

Many financial advisors agree that in some cases, when life settlements are done under the right circumstances, they can make clients flush and happy. Life settlements may work for someone who has excess life insurance, who has already addressed estate planning needs or who has cash flow problems and no way to pay those burdensome premiums.

"I'm looking at one right now," says Stephen Lovell, CFP with Forsyth Heritage in Walnut Creek, Calif. "This is a 77-year-old man who's financially secure. He and his wife have assets and sufficient income for their lifestyles and he doesn't like the fact that he's still making premium payments. One important factor is that he bought this policy late in life when he was 72, so you could say we're trying to reverse a mistake he made five years ago in buying a policy. ... He has lifestyle needs [rather than] a need to produce a bit of cash when his wife passes."

Advisors caution, however, that a policy seller should only consider working with a brokerage that is dealing with institutions (thus, avoiding the hit man problem). They also want to know how many names the broker is getting the quotes from and who is giving them, to ensure that the broker is really out there searching for the best deal.

Once you decide the deal passes the smell test, however, the thorny issue becomes knowing how, exactly, you price an old insurance policy. It's like trying to sell your car without having a blue book.

"It's a negotiated sale," says Tere D'Amato, director of advanced planning, wealth management at Common wealth Financial Network. The life settlement company, she says, "expects to give you a low offer in the beginning and they expect that you will come back with a counter offer. But unlike car negotiations, sometimes you don't know how low you can go. You don't know what the spread is. ... How do you know you can't push a little further?"

It doesn't help that commissions for the brokers make up a huge chunk of the kitty being paid out. Some place it at 10% to 15% of the purchase price.

"I agree that the commissions are frequently too large," says Buerger. "Having said that, the consumer is still getting more than what they would from the carrier. We believe that our commissions are less than any of our competitors on average. On average an agent or broker receives 2.4% of the face amount. The commissions from some of our competitors can be three or four times that. The clients can always ask what the commission is and in some states [disclosing the commission is] required."

Drilling Down
Glenn Daily, a fee-only licensed insurance consultant based in New York who runs a Web site called "," examines offers for life settlements on behalf of policy owners for a fee. Even he thinks the secondary market is a mysterious area.

"As I do more of these pricing exercises," Daily says, "I am increasingly finding that there are questions about how the pricing is done. I can tell you my own experience. ... Everyone is different. Every policy has its own quirks and I'm constantly running into missing information."

To put it very basically, Daily says, the gross price of the policy (taking the commission out of play), can be calculated as the expected present value of the future death benefit minus the expected present value of the future premiums and other costs for the deal (overhead, admin, etc.). "And the difference," he says, "is what the buyer can afford to pay. That's the price of the policy."

"Another way to say that," says Buerger, "is what's the projected internal rate of return if somebody lives to and dies at life expectancy."

Daily says that when he evaluates polices, he, like the buyer, is usually working off the "in-force illustration"- what the insurance company requires to be paid in premiums for the contract to stay in force until maturity (typically age 100). He uses this illustration, plus the annual statement, and then the client's personal contract itself to try to untangle the insurance company's load structure. The cost of insurance is not usually given out by the insurance companies, and Daily must use the available information (premium loads, underwriting costs and administrative charges) to fill in the blanks.

"You have to reverse engineer the policy," Daily says. "I'm creating my own illustration software that lets me figure out what the minimum premium is that is necessary to keep the contract going." This mirrors what the buyer is doing on the other side of the table.

After Daily has created a new illustration to solve for the policy's load structure, he uses life expectancy evaluation reports to come up with a monthly mortality table to estimate the insured's probability of death each month. This is one of the most important ingredients, and it can be based on a variety of different life expectancy tables, say from AVS, Bragg Associates or 21st Services, or from the client's own life expectancy estimate (using his own doctor's reports and appraiser). After all, everybody has a different view of life expectancy (most importantly, the person who doesn't want to die), and such wide ranging life expectancy figures can make a big difference when both a client and the broker are looking into the crystal ball of value. This is one of the reasons for the wide disparity of pricing. The longer you live, the longer the buyer is going to have to be paying those premiums, which means that a longer period of time would make it less appealing for them.

However, even when using what might be considered unfavorable life expectancy calculations, there are nuances to the industry that can help get the seller get a better deal.

Says Dick Weber, president of insurance consulting firm The Ethical Edge Inc. in Carlsbad, Calif., "It may be that you wind up getting a significantly better offer from one funder, where all the others may be more or less similar, because that one funder needs your life expectancy calculation to fill out their portfolio from an actuarial standpoint, so it is more rounded out. There is that nuance in the pricing that makes it something of the Wild, Wild West."

Daily takes each premium payment at the beginning of every month in his illustration and multiplies this by the probability of survival in a given month (based on the life expectancy table). Meanwhile, the much larger death benefit is multiplied by the probability of death for every month, which rises as the probability of survival shrinks. Using these two figures, rolling downward through time side by side, a net expected value is arrived at each month. Each of these monthly figures is then discounted for the buyer's targeted rate of return. The higher the rate of return the buyers want, the less they are willing to pay.

"You're talking about 10% and up," Daily says of the discounts. "The cases I've been working on recently the buyer want a 13% discount rate. Other cases have been getting a 15% discount rate."

These monthly net values are then added up to determine the gross purchase price, changing the cash flows in the illustration into an expected present value, Daily says.

You also must then take out the life settlement provider's expenses to pay for medical records, life expectancy evaluation reports, advertising and overhead. Daily says that, given the proprietary ways that buyers such as Coventry and Maple Life Financial Inc. are coming up with their offers, he assumes that the expenses are factored into the discounts the buyers ask for.

Daily usually has an advantage over the buyer, he says: Working on behalf of the seller, he often has more information, and a copy of the actual contract before the buyer does, as well as the annual statement.

"I have the contracts, the in-force illustration and usually have the annual statement. Typically, the buyers have the in-force ledger. That's what they're usually working off of, and they don't see the contract until later. My experience is if there is some question of the pricing, there are some features of the contract that are only explained in the contract."

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