"How Business Ethics Improves Your Bottom Line Articles"
Estate Planning M a y 2 0 0 4 Life Settlements: The Emergence of a Nascent Industry Noam S. W eiss ated an active secondary market for home A ccording to a study released in June 2 003 mortgages, life settlement firms are now INSIDE by C onning R esearch & C onsulting, Inc., playing a similar role for the sale of life life insurers’ profit margins— which C onning points out are already under intense pressure policies that the owner no longer needs or wants. Prior to life settlements, policy- THIS ISSUE due to lower investment returns— are now holders had minimal “ ex it options” once being sq ueezed further by the rapid growth in they decided the policy was no longer 3 the life settlement industry. needed. They either let the policy lapse or L ife S e ttle m e n ts a n d P la n n e d G iv in g The meteoric rise in the industry has even settled for its cash value— in either case caught the attention of overseas investors. A s leaving huge sums of money on the table reported in the May 1 5, 2 003 issue of the of their life insurance company. 3 B ritish business magazine T h e E c on omist, after A ccording to an article entitled “ The F in a n c ia l S e r v ic e F o r u m — W h e re K n o w le d g e savings accounts and government bonds, life B enefits of a Secondary Market for L ife E n h a n c e s Y o u r S u c c e ss insurance may be the most respectable of Insurance Policies” published in O ctober investments due to the new secondary market 2 002 by Professor Neil A . Doherty of the for life insurance policies. The magazine W harton School at the University of Penn- 5 reports that life settlement firms bought $2 bil- sylvania and Hal Singer of C riterion Eco- C a ll fo r A r tic le s lion worth of policies ( by face value) last nomics L L C , “ The creation of a secondary Estate Planning N e w sle tte r year— 1 0 times as much as they acq uired in market or the enhancement of an ex isting 1 9 9 8 when the industry first started to emerge. secondary market improves the value of the Some estimate that the industry’s poten- underlying good to consumers by making it tial is comprised of A mericans over 6 5 a more liq uid asset.” The writers conclude years of age with life insurance coverage that a competitive secondary market for life worth $500 billion. insurance policies improves the welfare of Investment opportunities aside, the fact both new and ex isting policyholders, and remains that life settlements would not have they call for lawmakers to design regula- gained in popularity had the industry not been tions that encourage, rather than dissuade, providing a valuable service to policyholders. such participation or investment. The secondary market was created by con- sumer demand, and as our aging population It’s the Right Thing continues to soar and baby boomers begin to Do for the Client reaching the life settlement threshold age of Producers will want to take heed of the 6 5, the industry will likely ex perience steady “ life settlement 8 00-pound gorilla.” The growth for at least the nex t decade and longer. word is getting around, and agents owe it to their clients to discuss the option where A Pr o-Consumer W ealth appropriate. O therwise, they may find Management Tool Just as Fannie Mae and Freddie Mac cre- c o n tin u e d o n p a g e 2 Estate Planning Estate Planning M a y 2 0 0 4 Life Settlements continued from page 1 their clients wondering why their trusted from the life settlement are used to purchase a adviser did not inform them of this option single-premium immediate annuity (SPIA) and may take their business elsewhere. and the monthly income from the SPIA is In fact, an article published in the Pennsyl- used to finance the premiums for a replace- v ania L aw Week ly (January 5, 2004 ) entitled ment policy. Such a transaction makes sense, “An Often Overlooked Asset” states that an especially when the policyholder has a rated attorney has an obligation to analyze the cir- health history. Life settlements and annuity cumstances to determine if a life settlement is arbitrage can present an extremely powerful possible to gain the most for the client. option, and producers should be familiar with this transaction in order to advise their clients When Should a Life when such an option seems appropriate given Settlement be Considered? the circumstances. Situations where a life settlement may be appropriate for a senior age 70 or older The Bottom Line might include: Life settlements grew out of a consumer A comp etitiv e second ary • divorce situations demand by seniors seeking liquidity for life • an underperforming policy that can be insurance policies they no longer needed or mark et for life insu rance wanted. This new financial planning tool replaced with new coverage given the p olicies imp rov es the revised mortality tables, resulting in empowers seniors to make decisions regard- cheaper insurance for seniors ing this aspect of their asset allocation. For w elfare of b oth new and • when the senior intends to let the policy financial service professionals to ignore this ex isting p olicyhold ers. lapse because he or she can no longer emerging market irrespective of its benefits afford the premiums to the consumer would be contrary to their • business bankruptcy fiduciary responsibility to the client. • when the insured has outlived the ben- It is important that financial profession- eficiaries als do their research on this emerging • when there is a need for liquidity to industry and weigh the benefits of this invest in new financial products, such as estate planning tool when presented with long-term care, annuities, stocks, etc. situations where it may be appropriate. I • key person policies no longer necessary due to change in ownership of a business Noam S. Weiss is co-C EO of Settlement B en- • lifestyle changes where the policy is no efits A ssociation, a fu ll-serv ice life settlement b ro- longer needed in order for heirs to pay estate k erag e in Tamp a, F la. Throu g h a netw ork of taxes upon the death of the policyholder licensed fu nd ing g rou p s, the comp any help s p oli- • buy-sell agreements where the policy cyhold ers and their tru sted ag ents to u nd erstand that was previously purchased to finance and max imiz e the v alu e of life insu rance p rod u cts. a buy-sell agreement is no longer needed Settlement B enefits A ssociation accep ts ap p lica- after one or more of the participants tions for p olicies of at least $ 2 5 ,0 0 0 and has leave the business or it has been sold receiv ed the ap p rov al of the National Ethics B u reau , an org aniz ation of ap p rov ed financial Annuity Arbitrage ad v isers w ho hav e maintained an ex emp lary and Life Settlements record of b u siness ethics. M r. Weiss may b e Another popular use for life settlements is reached toll-free at 8 8 8 -2 8 7 -1 4 3 7 , or v isit the “annuity arbitrage,” where the proceeds www.settlementbenefits.com. 2 Society of Financial Ser vice Professionals