One would be hard-pressed to name a financial product that was actually helped by last fall’s “financial meltdown” and the slow months of recovery, but one of the most severely damaged had to be life settlements. A relatively young business, the life settlement market has seen its share of change in the relatively short period that that it’s been around. Originating out of the viatical settlement business that took hold in the early days of AIDS, this business has always had both financial hurdles and public relations hurdles to overcome.
The most recent hurdle is most certainly of a financial nature. Just as it seemed that the business was gaining greater professional respectability, both among the general public and among top people in the life insurance business, the capital markets were hit hard and funding for the purchase of life settlements seemed to vanish. The word we heard from producers was that the demand from people who wanted to sell their life insurance policies was stronger than ever. After all, if you’re strapped for cash, the sale of an unneeded life insurance policy might be a terrific solution. But there simply was not enough cash in the markets to fund the purchase of the policies available for sale.
In light of that tough background, we thought it would be good to get the producer’s perspective on what’s happening in the market today. I invited the following group of life settlement producers to share their thoughts on the market and where it’s headed: Philip E. Harriman, CLU, ChFC; Rick B. Johnson, Esq., and his associate Jack R. Mills, MBA; and Timothy B. Watkins.
1. Charles K. Hirsch: How has the current financial situation affected the life settlement business in general and your life settlement business in particular?
Philip Harriman: The market has contracted significantly as a result of heightened scrutiny of “questionable” transactions and evaporating capital markets.
Rick Johnson and Jack Mills: The current economic conditions in the financial markets have affected the life settlement market considerably. There are still plenty of active funding sources available to purchase policies, just not as many as there used to be. The worldwide credit crunch and capital shortage had a temporary effect on lowering settlement offers to policy sellers as a result of a shift in supply and demand. We recently have seen new funders entering the market, however, who are willing to purchase policies at prices that are fair to both sellers and buyers. And although the market conditions slowed down our momentum and growth the past year, our internal technology and efficient processes have enabled us to continue to expand our company in a historically down life settlement market.
Tim Watkins: The state of the economy has had a profound impact on the life settlement business. I noticed the difference in June 2008, and the increases in the life expectancy reports, late last summer, further altered the landscape for the market. The secondary market practically dried up from September 2008 until the spring of 2009. Currently, the market is still very tight, but I have been experiencing some positive signs that capital is coming back to the marketplace for the purpose of buying policies. There’s a market cleansing going on, and currently the supply of policies available greatly surpasses the capital that is available. Earlier this year, I was very concerned that the secondary market would not turn itself around in time for me to continue in this business. I was fortunate enough to settle a couple of cases resulting in a career year already.
2. Hirsch: What is your outlook for the future of this business, and when do you see foresee positive changes happening?
Johnson and Mills: The outlook for the future of life settlements is very promising. We have already seen additional capital filter in to the market and expect that to continue. More and more producers and consumers are aware of life settlements than ever before. This will sustain the high volume of interest in the life settlement arena.
Watkins: My outlook for the future is very positive, and I have experienced the changes already. The marketplace is adapting to the current limitations of capital, and the funders have developed creative ways to purchase policies. For example, some are offering smaller up-front offers with participation in the death benefit at the death of the insured. Everyone, in every walk of life, has been affected by the economy. By helping the policy seller understand the state of the life settlement market, I am able to help create realistic expectations for him or her.
Harriman: The market will remain an option, yet in a more “securities regulation mindset” kind of environment.
3. Hirsch: Could you please describe the thought process behind your decision to enter this market?
Watkins: I stumbled upon this market approximately 10 years ago, while still a career agent for a large life insurance company. The first article I read about a “secondary market” for life insurance blew me away. I thought to myself, “Finally, there’s a market where life insurance consumers can realize the true market value for their policies.” Shortly after hearing about the life settlement business, I had a case. A friend and life insurance client bought a small company. Upon taking ownership and control of the company, he discovered that the company still owned a $1 million term life key person policy on the former owner of the company. He consulted with me and asked me, “What can I do with it?” I explained to him that a new secondary market for life insurance now existed. The end result was the sale of the $1 million term policy for $437,000. This transaction, without question, convinced me that the life settlement business was what the consumer needed and that it is here to stay.
Harriman: I made sure I had a strong knowledge of the market, combined with a relationship with a broker-dealer who entered this space with a strict protocol of disclosure and at least three so-called bids for the client.
Johnson and Mills: Our firm was founded by business professionals who saw a need for change in the life settlement business. Today, we’re helping to transform the business through advanced privacy protection, full disclosure of fees, and proactive regulatory compliance to ensure the highest level of integrity and value for our clients.
4. Hirsch: What criteria do you use in evaluating the companies that are active in this market, and how you decide who you want to do business with?
Harriman: I rely on my broker-dealer to perform the due diligence and only work with those who have withstood the rigor they impose.
Johnson and Mills: Our firm only works with institutional funding entities and licensed life settlement providers. We choose to do business with providers based on their background, stability, ethics, rating and money sources. In addition, a buyer’s proven ability to close transactions smoothly and with minimal hassle is very important to us and other producers with whom we work.
Watkins: When I decided to devote my career to the life settlement business, I was fortunate enough to have a mentor, Greg Albers. With my first case, Greg assisted me every step of the way. Greg Albers owns and operates Life Insurance Buyers, Inc., in Leawood, Kan. Greg has been a pioneer in the life settlement business and is well-known and well-respected for his knowledge and honesty. Greg advised me on what companies to choose for the submission of cases. A company’s membership in the Life Insurance Settlement Association (LISA) is a must. Things like strong capitalization, name recognition, personal experience with the company, and relationships with people there are all very important factors in choosing which companies I will submit cases to.
5. Hirsch: Could you please briefly describe the sales process you use, from finding prospects to educating them about what you do to closing the deal?
Johnson and Mills: We market directly to consumers through our Web site and other methods, and we work with producers with clients who no longer want, need or can afford expensive premiums on their life insurance policies. We meticulously prequalify all of our cases before sending them out to the market. This gives our producers and policy sellers realistic expectations, and also enables us to make sure that the case fits the parameters of the various life settlement providers. Once an offer is obtained, we blanket the rest of the market in an effort to bid up the offer and get as much as possible for the client. When an offer is accepted, we streamline the closing process for the consumer making it as quick and easy as possible.
Watkins: I work strictly on a referral basis. I have established very close relationships with attorneys specializing in estate planning, elder law and business succession planning; with trust officers at banks; and with accountants. I have spent a lot of time educating these professionals about the value life settlements can bring to their clients. I keep them up to date on important issues and in regards to any changes that may have occurred. I am very clear about how the “process” works and what happens as we proceed with the transaction, and I am completely transparent with every aspect of the transaction.
Harriman: The market activity in the last year and a half has come to a standstill. In the meantime, I’ve marketed to attorneys and accountants our process and integrity, in which we match up clients who no longer need or can afford their existing policies and show them how we may be able to create a higher value for them.
6. Hirsch: What’s the best practical idea you’ve used recently in selling life settlements?
Watkins: It may sound corny, but the best practical advice I can give anyone is, to be honest. Anyone involved in the life settlement business must divulge everything about the transaction. I am working on behalf of my clients. For every transaction in which I have been invited to participate, my fiduciary responsibility is to my two clients, any advisor who has asked me to assist him and to the client. One bit of added advice is to have a full understanding of the insurance policy you are trying to sell. I was fortunate in that I spent about 25 years as a financial advisor. I have a lot of experience and knowledge when it comes to understanding the different life insurance products. This knowledge has helped me in negotiations with potential buyers and has helped my clients (the sellers) in having a better understanding of what they may own as an asset.
Harriman: Life settlements are analogous to selling your house. You would not sell your house back to the builder for what he or she says it is worth. Rather, you would turn the sale over to a professional broker to ascertain what the open market is willing to pay for it.
Johnson and Mills: Given the recent market conditions, it is more important than ever for us to remain in constant communication with all of our funding sources. Since buyers’ parameters seem to change on a weekly basis, we always strive to be the first to know about new funding sources, updated life expectancy guidelines, and other purchasing parameters to stay one step ahead of the competition.
7. Hirsch: What advice would you give a producer who is trying to decide whether or not to add life settlements to his or her portfolio?
Harriman: Consider this market a security transaction, and use your broker-dealer as a clearing house of proper documentation and suitability.
Johnson and Mills: We strongly advise all producers, financial advisors, attorneys and accountants to always discuss life settlements with their clients in the appropriate circumstances. Life settlements are an important topic to discuss when evaluating a client’s ongoing insurance, financial, and estate planning needs.
Watkins: Do your “homework” first. The business has changed a lot over the past 18 months, and I believe it is a much tougher business in which to work than it ever has been. These changes, however, were necessary to cleanse the market. The life settlement business is not going away. It is here to stay and it will get bigger and stronger.
8. Hirsch: A recent article in The New York Times raised the issue of the potential securitization of life settlements. Do you have any thoughts on that securitization concept?
Johnson and Mills: Despite the recent sensational story published in The New York Times, we view the securitization of life settlement portfolios as an extremely positive development in the ongoing growth of the secondary life insurance market. Not only will securitization increase the overall size of the market, more importantly, securitizations will be subject to stringent purchasing parameters and actuarial models approved and overseen by rating agencies. Finally, the ill-informed media’s comparison to the sub-prime mortgage industry is misplaced. Sub-prime mortgage pools failed because homeowners stopped paying their mortgages. The primary variable with a life settlement is mortality, one of the few things we have not yet figured out how to avoid.
Philip E. Harriman, CLU, ChFC, is a 27-year Million Dollar Round Table member with 10 Top of the Table and four Court of the Table honors. From 2003 to 2008, Phil served as a member of the MDRT Executive Committee, culminating with his 2007 MDRT presidency. Phil is a partner in Lebel & Harriman, LLP in Falmouth, Maine.
Rick B. Johnson, Esq. is the president and Jack R. Mills, MBA, is the executive vice president of PolicyOptions, a nationwide life settlement brokerage based in Irvine, Calif. Mr. Johnson has been actively involved as an attorney and broker in the life settlement industry for several years. Mr. Mills has been in the life settlement industry for more than five years.
Timothy B. Watkins is the founder of Genesis Living Benefits Services, LLC, in St. Louis. He has worked exclusively in the life settlement business as a life settlement broker for the past seven years. Prior to starting his firm, Mr. Watkins specialized for 21 years in estate, business and investment planning for John Hancock Financial Services. As a senior representative of John Hancock Financial Services, Mr. Watkins was a prolific member of the Million Dollar Round Table and gained induction into John Hancock’s Hall of Fame.