Part 7: The Life Settlement Market

Life Settlement Market Watch

The Deal, TheStreet’s (NASDAQ: TST) institutional business report concluded that the life settlement market grew year over year for the first time in several years.  In 2014, the face value of life insurance policies sold reached $2.57 billion, an increase from $2.13 billion in 2013.

 

"This is the first time in several years in which the number of life settlement transactions has gone up. This can only mean the market is starting to bounce back after years of being in the doldrums following the recession. One of the main challenges that lie ahead for the market to continue to grow is consumer awareness. Most people still do not know that they have the right to sell their policies. Unlike the reverse mortgage market, the life settlement market remains largely unknown to the public."  -Donna Horowitz, Senior Editor for The Deal.

 

The Deal, a business unit of TheStreet, has been serving corporate dealmakers, advisers and institutional investors the most sophisticated analysis of the deal economy since 1999. Their transaction information service, The Deal Pipeline, is powered by a newsroom of senior journalists who offer proprietary research and reporting on M&A, bankruptcies, auctions, and financings.

 

36 life settlement providers contributed to this report.  All information was obtained through a public records request to state insurance departments.  Key information from the report is included in the table below.

Top Life Settlement Companies in 2013

Magna Life Settlements Inc.Coventry FirstSettlement Group Inc.Life Equity LLC
In 2013, Magna spent $153 million for policies valued at $930 million.In 2013, Coventry spent $71.8 million on 637 policies valued at $340.1 million.In 2013, Settlement Group Inc spent $12.5 million on 71 policies valued at $107.2 million In 2013, Life Equity spent $10.2 million for 65 policies valued at $121.9 million.

Number Of Qualified Policies On The Rise

There’s a misconception that the number of policies in the market is decreasing.  However, the opposite is true.  There are more “qualified” policies on the market since the decline in 2008.  So, even though there may be a decline the total number of policies, the number of policies ‘eligible for purchase’ is actually on the rise.  The quantity of ‘junk’ policies that have no value to life settlement investors has seemingly become ancient history.  The quality of the policies in the market has dramatically increased.

 

Another factor behind the upward trend of the life settlement market is the expanding senior population.  The number of seniors (Age 65+) is projected to continue rising from 42 million in 2012 to an estimated 70 million in 2030.  This only increases the potential of the life settlement market.

 

Likewise, the ratio of policies that can be purchased has actually increased.  This is for a few reasons:

  • Life settlement brokers and providers are becoming better at understanding which policies are “investor-qualified” before bringing them to the marketplace.
  • Consumer awareness of the marketplace is on the rise.  In fact, many states now require life insurance companies to make their customers aware of the life settlement market.  Medicaid statues in various states have proposed using life settlements to fund health care.
  • States classify life insurance policies as ‘assets’ when considering an applicant for Medicaid.
  • The Life Insurance Settlement Association is actively raising awareness of the life settlement market.

 

Major Capital Returning To Life Settlement Market

Investor demand is also quite high.  RIAs continue to allocate to life settlements in an effort diversify.  Life settlements are an alternative asset class that has little correlation to the equity markets.

 

Institutional investors also appreciate the potential for outsized risk-adjusted returns.  Because insurance companies usually have high credit ratings, the potential returns on life settlements are interesting.  Consumer confidence should increase as greater regulations provide protections for consumers and more certainty for the assets in general.

 

So, both the supply of qualified policies, as well as demand for life settlements, is growing.  Regulations are protecting buyers and sellers.  The major players have brought consistent capital and their expertise back into the market.  State governments have recognized the value of life settlements through disclosure laws and Medicaid statutes.   This market’s forecast should be green because awareness is on the rise, capital is returning to the market, and because policyholders can look at life settlements as a viable option.

 

As the life settlement market continues to refine and develop, more qualified policies will come to the market.  As investors continue to see the upsides, more capital will come to the market.  Whenever capital floods a market, the price usually goes up.  So, look for the price and the value of life insurance policies on the secondary market to go up.  If the average price of policies increases enough then look for more sellers to enter the market.  And so on.

New Laws And Regulations To Increase Consumer Awareness

While it’s not the most commonly understood option available to policyholders, it’s gaining traction and recognition among policyholders looking for alternatives to surrendering a policy or continuing to pay monthly premiums.

 

One California couple who were unaware of the life settlement option recently successfully sued their insurance providers for failing to disclose a life settlement as an option and they were forced to reduce the size of their life insurance policy twice from the starting point of $7.2 million to $2 million because they could no longer afford the higher premiums on their original policy.

 

Throughout the proceedings, the couple claimed that their insurance provider (Lincoln National Insurance Company) offered only two options to them. They could choose to surrender their policy for its cash value or they could pay higher premiums for the policy. No mention was ever made of the existence of or their ability to consider a life settlement instead.

 

The judge in this matter agreed that the plaintiffs that the insurance provider had a duty to disclose this option to the policyholder in a decision that may have far-reaching impacts on the insurance industry as a whole.

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