Risky Business: Top 5 Risks Life Settlement Funders Face
Staying in business is far harder than starting one, and no one knows that better than a Life Settlement Funder. Few talk about it, and fewer still understand how much these funders put on the line.
We work with funders all over the country and appreciate how difficult the business is. This article will review the top 5 reasons why Life Settlement Funders may be considered as the greatest risk-takers in financial services.
Risk #1
There are not enough life insurance policies made available for funders to purchase
Funders have plenty of money to invest, but not nearly enough life insurance policies to appraise and buy
This statement is misleading at first glance, as there are plenty of life insurance policies that could be bought by a funder. In America, more than $20 trillion of life insurance is in force. Each year roughly $180 billion of face amount is irrationally terminated without Life Settlement quotes. Yet in the past four years, less than $10 billion of life insurance has been sold for a Life or Viatical Settlement.
The issue is rooted in a lack of awareness in the general public and those who advise the public on what to do with their financial assets. In addition, the public is often unaware of the specific rules and benefits around selling their particular type of policy.
Here is the hidden tragedy: historically, payouts have ranged from 4 to 8 times the cash surrender value, such as in a Whole Life policy. Convertible Term policies are the most favored by funders, but very few realize this. We see this lack of knowledge cost consumers dearly: Once a convertible term policy loses the ability for a Funder to convert it to Universal Life or Whole Life, it is usually impossible to sell. They often call us after the conversion deadline has passed, not knowing the consequences.
Risk #2
Lack of both Financial Advisor and General Public Awareness about Life Settlements
Very few licensed professionals help transact Life Settlements. Many have an employment contract that forbids it; others have not experienced success with Life Settlements, and most frankly do not know where to begin.
The general public is largely left to asking for referrals, going online, looking at TV ads and going with low-bid funders, and then deciding whether to try some resource or give up let the policy go.
Here is the hidden tragedy: historically, payouts have ranged from 4 to 8 times the cash surrender value. Convertible Term. Term policies are the most favored but very few realize this. Once a term policy loses the ability for a Funder to convert it to Universal Life or Whole Life, it is usually impossible to sell. We often get calls about Term policies after the conversion deadline; without the help of a knowledgable advisor or CPA, the consumer would have no idea the conversion deadline would have any implications on a life settlement transaction.
Risk #3
Low-Interest Rates and policy Cost-of-Insurance Increases
At the end of 2008, the Federal Reserve’s interest rates were effectively brought to zero when inflation was considered, and rates have remained historically very low until recently.
In turn, this has reduced the life insurance Industry’s return on investments. A growing number of carriers are exercising their contractual ability to raise their Cost of Insurance (COI) charges in Universal Life policies. COI includes charges for mortality, administration, and other expenses. Increases of 5 to 50 percent have been the norm, though one carrier bumped its COI up 95 percent to 600 percent.
The combined result has been the poorer internal growth of Universal Life policies. This represents an unexpected challenge for Life Settlement Funders who had not assumed “worst-case” COI increases. Some small number of COI-increased policies are coming to market, but they are costlier to buy as a result.
As time goes one, Funders have to pay very close attention to each carrier’s internal finances, because try to guess how many more companies will raise their COI is a bit like catching a falling knife.
Risk #4
Unpredictable Advances in Medical Science
Fortunately for us all, mankind is living longer today than ever before. In 2015 there were nearly a half-million people age 100 or more. That was over four times as many than in 1990, per the United Nations. In 2016 Pew Research forecasted an 8-fold increase in these centenarians by 2050.
Funders are well-aware of this and worry about old Whole Life policies when the Insured might live to 100. When that happens, the cash value equals the death benefit and is paid to the policy owner as cash, not tax-exempt life insurance.
Further proof of American longevity came in 2008 when the Society of Actuaries issued a Valuation Basic Table that forever changed the Life Settlement Industry. Overnight, portfolios of purchased policies had to be revalued because lifespans were so much longer. This was done again in 2015 with an even larger population. The good news was that the Industry was finally able to selectively buy some cases that might live up to 23 more years. It also meant that portfolios had to be revalued once more but it was not as extreme as in 2008.
Funders also realize that they are essentially betting that American medical science will not sufficiently cure the Insureds covered by purchased policies. They also know that AIDS was often terminal and considered incurable until wonderful breakthrough medicines were approved in 1996. Obviously, this was a huge, positive milestone in medical science and will continue to save many lives. It just so happened that Funders that had high exposure to AIDS-related policies went bankrupt. This can and will repeat as more medical breakthroughs come forward. Our gain can be their loss. This is why an actuarial analysis yields the largest payouts, as funders must be able to truly understand the health profile of the policy owner.
Risk #5
TV Competition: High Volume low-bidders
In recent years 10 Funders have bought the bulk of policies, with another 10-20 niche Funders doing the rest. Several Funders, one large, are now seen on TV ads.
Many Policy Owners were made aware of Life Settlements in this fashion because their licensed professional had nothing to say on the topic. The challenge for those not on TV is to educate Policy Owners why robust competition among Funders yield more money than going with just one. A top-tier Life Settlement Broker will be sure to canvass all who might have an interest, including the ones on TV – but NOT limited to the ones on TV.
We independent Life Settlement Brokers help the marketplace determine who will place the best offer, picking no favorites.
Hat’s Off!
Since 1998 our cases have been seen by dozens of Life Settlement Funders. Many have gone bankrupt due to industry shifts and changes in medical science. Other have been bought out by competitors. Our hat’s off to all of them, past and present. They put everything on the line day after day with real money. More power to them!
