‘Irrational exuberance’ settles down as secondary market continues to mature

In 2006, Agent Media’s first-ever life settlement survey of producers indicated that, while only 18 percent of agents at that time had ever completed a life settlement transaction, more agents would have been willing to explore the option if they were better educated on the process.

Today, that number has nearly doubled, with 35 percent of agents having transacted a life settlement in their career, representing a steady climb since 2006, according to the third annual Life Settlement Study, conducted by Agent Media in partnership with the Life Insurance Settlement Association (LISA). (Chart 1)

But while more agents this year than ever indicate that they’ve at least explored the secondary life market, the study shows that, even though producer optimism spiked between 2006 and 2007, some producers are beginning to back off. When asked if they would discuss life settlements with clients who met the requirements, 79 percent of producers this year said yes, down from a high of 88 percent last year. (Chart 2) Forty-three percent of producers this year also said they expected to perform a life settlement transaction within the next 12 months, down slightly from 54 percent in 2007. (Chart 3)

According to Doug Head, president of LISA, however, these numbers do not necessarily represent less activity overall in the life settlement market activity overall. In fact, he said, his association has seen more activity in the past few years, and it’s only growing. The difference, he said, is that more casual life settlement producers are exiting the market after having experimented with the transactions, while those who remain are creating more volume.

“There was a little bit of irrational exuberance last year, and maybe this year we’re seeing some of the fluff being boiled out of the market,” said Head.

Nonetheless, he said, the numbers are still not as high as his organization would like them to be.

“It’s evident to me after seeing life insurance professionals in the legislative arenas that a lot of them aren’t getting it,” said Head. “It’s amazing how many people still don’t recognize (that life settlements) can bring value to a consumer. It’s an ongoing challenge.”

Market opportunities
The market is ripe for life settlements — transactions by which life policyholders sell their policies to institutional funders for a sum greater than the cash surrender value but less than the death benefit. As an alternative for consumers with a life policy that’s no longer serving them as originally intended or that they can no longer afford, settlements can offer them more money than if they surrendered or simply lapsed their policy. When the original policy owner dies, the funder (rather than the original beneficiaries) collects the death benefit from the insurer.

Seventy-five percent of agents have clients age 65 or older whose life insurance needs have changed since they purchased their policy. It’s these clients’ policies that funders are most interested in — the ideal policyholder is older than 65 and in less-than-ideal health, with a policy value greater than $500,000 (though more providers are now beginning to specialize in smaller-face-amount policies).

Sixty-two percent of agents, however, never even discussed the life settlement option with their clients who surrendered policies.

“If (the agents) are deliberately not speaking to them, that’s a bad thing,” said Head. “Maybe they’re threatened by their company or they feel there is some risk, but whatever the case, they’re not understanding the risk of not talking about it.”

An inside look at life settlement activity
The greatest reason why clients have engaged in a life settlement transaction, according to 35 percent of those agents who have transacted a settlement, is that their insurance needs have changed or no longer exist.

Other reasons include a change in cash or income needs (17 percent), unaffordable premiums (16 percent) and a desire for cash to fund other investments (11 percent).

Thirty-eight percent of agents who have transacted a life settlement say they have sold at least one other insurance or financial product as a result. Annuities (42 percent), life insurance (34 percent), and long term care insurance (18 percent) were the three most popular cross-sold products.

Nearly half the agents surveyed (42 percent) said that, aside from financial or insurance products, their clients typically use their life settlement proceeds to cover living expenses.

As in past years, the study shows that the vast majority of agents who do not intend to transact a life settlement in the next 12 months are shying away because they do not know enough about life settlements (65 percent). (Chart 4)

And, once again, most agents (29 percent) say their biggest challenge by far is that they need a better understanding of life settlements, highlighting the need for brokers, providers, and organizations to provide better education for their producers on this market.

Interestingly, prospecting seems to have become less of a challenge for producers, with only 12 percent naming it as their most significant challenge this year (as opposed to 24 percent last year). Head believes that this shift shows that consumers are more aware of life settlements and, if they’re not the first to bring it up with their advisors, they may at least be more receptive to the idea when presented with it.

Brokers and providers
Twenty-two percent of respondents have worked directly with a life settlement provider; of those, 36 percent typically seek bids from only one provider. Twenty-six percent seek bids from two, 20 percent use three, and 4 percent use four — yet 14 percent typically seek bids from six or more providers. Head said that, when working directly with a provider, producers should be working with more than one; only one provider means only one bid, and agents who go this route could be unknowingly cheating their clients out of a better offer from another provider.

When working through a broker, however, Head said, agents would do best to only use one.

Twenty-eight percent of respondents have worked with a broker, and 22 percent said the biggest advantage of doing so is the ability to obtain multiple bids to get the policy owner the most competitive price. Nearly half (49 percent), however, said they don’t know the major advantage of working directly with a settlement broker — and fifty-two percent said they don’t know the advantage of working with a provider, either.

When seeking a provider, the study indicates that compliance (93 percent) is an “absolute must-have,” which is good news to Head. “Agents are beginning to understand the significance of compliance in this area. Out of all other things, one of the fundamentals you need is compliance,” he said.

The future of the market
Brokers and other industry experts see the settlement market charging ahead in upcoming years as awareness and the life industry in general continue to grow. Rick Johnson, president of the brokerage firm Policy Options, said he expects more consolidation in the life settlement industry, with several mergers, acquisitions, and consolidation of brokers and providers, and a more streamlined process.

Evolving technology will also likely play a role in the future of the industry, with networked computer systems allowing producers, brokers, providers, and funders to interact more efficiently, Johnson predicted. “I think agents have got to realize that in some cases — but not all — life settlements are a great financial planning tool and that there is a fiduciary responsibility to the client to make them aware of this opportunity,” said Life Settlement Solutions CEO Larry Simon of the future of the industry. “It’s not for everybody, but agents should become more educated in this product as they do any other product. It’s still a high-profit item to them and does provide benefits to the client.”

Christina Pellett is managing editor of the Agent’s Sales Journal. For more information on this and other studies, call 800-933-9449 ext. 226 or email This email address is being protected from spam bots, you need Javascript enabled to view it .

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