Which Policies Are Most in Demand For Life Settlements?
(The Settlement Watch, August 13, 2007)

The good news for anyone looking to shed an unwanted life insurance policy without simply surrendering it is that the life settlements market has a place for them. The bad news is that, as with any other marketplace, some products are more in demand than others.

“If a policy is assignable, it’s sellable,” says Scott Kirby, co-president of business development and compliance issues for Advanced Life Settlements in Orlando, Fla.

While the average settlement involves a policy on an individual who is over 75 with a $1 million-plus death benefit, a place can be found somewhere in the secondary market for any type of policy. “The market will still buy any policy, with any age and any death benefit,” Kirby says, “based on underwriting.”

Essentially, the secondary market is not significantly different from the primary market, he argues. Life insurance carriers will sell coverage within certain parameters based on their underwriting, he says, and funders of life settlements are no different.

For some funders, he says, those parameters can involve the types of policies involved. “Some funders don’t buy whole life; some don’t buy second-to-die policies.”

In addition, many providers deal with several different funders, and may therefore be working off of several different sets of parameters, he notes.

But while the market may have room for all types of life products, some are more popular than others.

“In general, the sweet spot for providers is a universal life policy with premiums of less than 5% of face value and not too much cash,” says Russel Dorsett, co-managing director of Select Life Settlement Corporation, Bellaire, Texas.

The reason why UL policies are the favorite among funders, according to Jim Wolf, president of AIM Life Settlements, Inc., Darien, Ill., is “the flexibility that the buying source would have” to change how much they would have to lay out for the policy. “They would be able to adjust it out to age 100” in terms of the insured’s life expectancy, he says, reducing the premiums they would have to pay.

Those sentiments are echoed by Kirby, who notes that, with UL, “there’s no fixed premium schedule, and you can pay an annual minimum premium to keep the policy in force.”

Wolf offers a “very ballpark” estimate that as much as 90% of the transactions conducted by AIM involve UL policies. “Typically, a funder looking to buy a policy would want an illustration out to age 100,” he says.

The next most popular types of policies, Dorsett says, “would be a term policy that can be converted.” It is common, he noted for term policies to include an option that would allow conversion to UL policies. That provision helps attract funders to those policies, he says.

In fact, Wolf says many funders who are looking to buy term policies on the secondary market are looking for those that can be converted, or will be prior to the sale.

Some funders, he said, “will make any offer contingent upon being able to convert it to a UL policy.”

Beyond UL and term policies, Dorsett says, “there is some market” for products such as survivors or “second to die” coverage, although he notes that circumstances would have to be a very good fit for what the buyers are looking for, such as one spouse having already passed away or both with shorter expected lifespans.

On the flip side are whole life policies, says Kirby, noting these are much more rigidly structured. “They don’t afford you the same flexibility that you get with a UL policy,” he says.

As a further example, Kirby notes that the funder could not take money out of a whole life policy except through a loan, whereas a UL policy allows for more ready access. “It’s just a more flexible product for funders to buy.”

Dorsett holds a similar view. Selling a whole life policy on the secondary market “can be extremely difficult,” given that the policies typically have higher premiums and a higher cash value, he points out.

Variable life policies face almost as tough a road as whole life policies, Wolf says. There are “not many funders” looking for variable life policies due to the complexity of the product, he says, noting that his firm does not conduct transactions with variable policies.

In addition to the complexity of the policy itself, variable products also come with an increased regulatory burden, he notes. That’s a second reason why AIM shies away from them, he indicates. The Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers) has stated that since variable life policies are securities, anyone involved with a life settlement involving such a policy must be a registered broker with FINRA.