Life Settlements on Rise
Companies tap hidden asset - Life settlement industry on the rise
By DAVID TOTH
The mention of a life insurance policy as an investment tool would likely have drawn a questioning look a few years back. But companies like LifeOptions L.L.C. of Stamford, that are geared toward taking advantage of what they call a rapidly growing life-settlement market, are banking that this option will become more widely known among older investors in the years to come.
Life settlement is the sale of an insurance policy to a third party for more than the cash value, but less than the face value.
According to figures from the Life Insurance Settlement Association (LISA), $15 billion of life settlements have been transacted in the past five years, with $20 billion to $30 billion projected for 2007.
LifeOptions L.L.C. was founded last year from $1.5 million in private equity by Bill Avery, Jim Pugliese and Ted Pryor. They wanted to translate their experience in the financial and insurance service industries into a company that would take advantage of the rapidly expanding market.
“We’re a brokerage. We work with the insured on one side and we represent them in the secondary life market where there are 32 licensed institutional funds and we work with these funds and we seek the highest and best offers,” Pugliese said.
There could be many reasons for a healthy senior to sell an insurance policy.
“Their beneficiaries are grown up or they don’t want to pay the premiums or it is no longer necessary. Before, their only choice was to send it back (to the insurance company) and get the cash value of the policy,” Avery said.
“It could free up money that’s otherwise locked in, so it can be invested (elsewhere),” said Steven Schurkman, a partner at the law firm Keane & Beane P.C. in White Plains, N.Y., who specializes in estate planning and elder law.
A policy bought 20 years ago may not meet the needs of today and some might choose life settlement and then buy another policy with more appropriate terms, which often means lower premiums, Pugliese said.
Although the life settlement market grew out of the viatical industry of the late 1980s, where people infected with the HIV virus, or AIDS, cashed in on their policies to buy medicine, there is indication that seniors selling their policies are driven by more than dire circumstances.
“Most of the policies (that we deal with) have a $200,000 face value or above,” said Avery, LifeOptions’ chief executive officer.
Avery said the highest is $20 million and he has a “couple in the pipeline that are well over $10 million.”
Cliff Rosenberry is co-owner of McCartney & Rosenberry, a property and casualty insurance firm in Ardsley, N.Y. He is also a former president of the Independent Insurance Agents & Brokers of New York.
“We don’t see a whole lot of (life settlement cases), but there are a couple of people who have done it. In some cases, we have advised against it because of the amount of the assets.”
If an elderly person has large assets, upon his death, relatives can use the life insurance proceeds to pay the taxes on them. Life settlement would exhaust that option.
“The concern that many have is that when there’s cash dangled in front of somebody, they don’t always have a clear judgment whether or not to keep the policy,” said David Woods, chief executive officer of the National Association of Insurance and Financial Advisors (NAIFA). “Whereas if they had a good financial adviser, they could go through a needs analysis.”
The NAIFA comprises 800 state and local associations and it advocates for a positive legislative and regulatory environment.
“States’ insurance departments are currently looking to see if they should in fact regulate this (life settlement),” Woods said.
LifeOptions doubled to 22 employees over the last year and now has a sales presence in four markets. The 20 policies it processed last year generated more than $6 million of incremental value and this year, Pugliese said, the company hopes to close some 100 policies that represent $300 million in face amount, mainly from policy holders in Fairfield and Westchester, N.Y., counties.
The obstacle to market penetration is consumer awareness.
“Ninety percent of our marketing is education oriented,” Avery said. “We hold webinars with PowerPoint presentations that go through aspects of life settlement and we hold seminars for our agencies. LifeOptions has been approved to hold continuing-education classes for insurance brokers on the topic of life settlements.”
As more baby boomers cross the 65-year mark, the available policies will only increase. The 2000 census indicated that New York has the third-highest population of seniors in the nation, 2.5 million, trailing California and Florida.
A 2002 University of Pennsylvania, Wharton School of Business study found that life settlements represent the fastest-growing alternative-asset class in the nation. Of a total $11 trillion of life insurance in-force, $500 billion is owned by seniors above the age of 65, and of that amount, $160 billion qualifies for life settlements.
Source: Fairfield County Business Journal
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