Life Settlement Seller Expectations vs. Market Realities

In my last post, I talked about some of the factors currently weighing on the life settlement industry. A smaller pool of buyers, increased regulation and longer life expectancies just to name a few. However, with this post we will explore the real world implications of an industry with less buyer activity and conversely how the consumer’s expectations are factoring into the equation.

It is helpful to once again use the real estate analogy I’ve often used before to illustrate the life settlement industry when examining the current expectations of policy sellers. In much the same way as home prices have fallen dramatically over the past couple of years, life insurance policy values on the secondary market have also dropped. To that point, just as some home sellers have decided to hang on to their real estate assets hoping for a rebound in valuations rather than sell, some life insurance owners are also holding onto their policies waiting for a return to peak levels. This raises a number of issues that we will evaluate against the back drop of a recent case.

First the rationale for selling real estate assets is usually different than that of selling a life insurance policy. Most often real estate is sold to facilitate a geographical move for reasons such as work or family. When real estate is owned solely an investment, the owner has the option of renting the property and generating income while they wait for better valuations. This is fundamentally different from the typical selling scenario of the average life insurance policy owner. They often cite their reason for selling as the policy is no longer needed or they don’t want to continue paying premiums. They never have the option of generating income with the policy while they wait for a market return. I wouldn’t consider accruing cash value within a policy anything close to generating income by the way. Nonetheless, expectations of asset sellers either in the real estate or life insurance realm shape the market dynamics. Sellers in both arenas must accept the reality of the 2010 marketplace. This was never more apparent than a recent case that came through the Amrita Financial system.

For confidentiality reasons I am going to leave some of the case specifics rather vague, but the point should be obvious. This case on the surface seemed fairly attractive. The case involved an 83 year female insured by a quality carrier for in between $5 million and $10 million. The Universal Life policy was premium financed at one point, but the note was paid off over a year ago. This policy owner had an identical policy which was sold in a life settlement over two years ago. The identical policy previously sold for an amount into the 7 figures. After putting the most recent case in front of almost 30 different life settlement providers only 4 were serious enough to price the policy or make an offer. That in of itself should indicate how much things have changed in the past 2-3 years.

Not only are policies across the board receiving lower valuations, but this case had additional factors resulting in further discounting of the offers. While the policy was owned in a very life settlement friendly state, the insured lived in Florida. Florida has the dubious honor of having probably more life settlement providers completely pull out of it than any other state. When I say pull out, I mean absolutely avoid any case that has any nexus to Florida in any way. Insured, policy owner, etc., etc.. Thus the available pool of buyers and chance for competitively bid offers is pretty slim for cases with even tangential connections to Florida. Secondly, the policy was premium financed. Again even though on the surface that shouldn’t matter much since the note was paid off over a year ago, it adds further discounting to settlement offers. Thirdly, the policy was large enough that it was getting close to “jumbo” status which is not currently en vogue. That of course means less competition and even further discounting. Interestingly enough, all three of the aforementioned factors, (policy size, FL as the insured’s state of residence and premium financing history) were probably not considered reasons to discount life settlement offers 2-3 years ago.

In addition, the insured’s life expectancy is probably said to be higher today by medical underwriters than it was 2 years ago. This is because the life expectancy tables have been modified to be more conservative and reflect increased longevity.

The policy seller did receive offers in the mid six figure range this time around. However, it was their expectations based on the 2007 life settlement that prompted them to turn them down. They are hoping to hold out for a higher valuation in the future. Much like the real estate owners that are holding out, this seller believes a higher offer will be available sometime down the road. The owner is probably right as the insured will be older, thus making the policy more attractive to a buyer. However, they will have to pay the ongoing premiums much like a property owner has to continue paying a mortgage. Except, nobody will pay rent for the policy in the meantime. Furthermore, several of the factors such as the insured’s domiciliary state, premium finance history and large size will continue to prompt discounting in the offers. At the end of the day, the choice as always lies with the policy seller. However, policy sellers need to remember that just as the real estate market has changed, so has the life settlement market. Understanding today’s market is an important consideration when making a financial decision about a life insurance policy.