I read your article regarding life settlements and the response thereto (Viatical settlements stage comeback to insurers’ chagrin, April 2014 edition). I would add to the conversation that the ability to sell a policy is very clearly a benefit to seniors. When one has an asset, the ability to monetize it is based on the transparency and robustness of the market. So, if one owns a widely traded stock and no longer wants it, the click of a mouse can create liquidity. Conversely, if one owns shares of a closely held private company, he or she may be unable to turn that share into cash.In the case of an insurance policy, for more than 100 years, the only way to create liquidity was to surrender the policy back to the insurance company. Because this was the only option, the surrender value has historically been much lower than the value. By analogy, it would be as if one purchased a home from a builder, and the contract stated that the only person that could purchase the home back from the buyer would be the builder. If the children grow up in this example and the homeowner now wants to sell, he or she must go back to the builder. The builder, knowing he is the only option, may offer far less than the home value. So the choices are: (1) sell for less than fair value to the builder; (2) keep a home and continue making payments and upkeep even though you don’t want it; or (3) just leave the home for no payment and move away. But from the homeowner’s perspective, having the ability to sell to the market for the value that bidders would place on the home would be a much better option.
It is a similar scenario in life insurance. Without a market, your options are: (1) surrender the policy to the insurance company for less than its value; (2) keep paying premiums even though you don’t want or need the insurance; or (3) lapse the policy and receive nothing. None of these are great options, and historically the majority of insureds have chosen option 3 and walked away from policies to avoid further premium payments. A fourth option, sell it for what the market will pay based on transparent bidding, is a much better option for the senior.
While it is true that there have been issues with this process, regulation of the settlement market in more than 40 states has created real protections for the seller of the policy. In fact, several states now require life insurance companies to disclose the existence of the settlement market to customers who are ready to lapse policies, showing the growing understanding that, as obvious as it sounds, receiving value for an asset is better than receiving nothing for it.
Dan Young, CLU, ChFC
Vice President, Portfolio Management
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