Despite their industry now being two decades old (in its current form), life settlement asset managers still, occasionally, have to undertake the role of educator when discussing the asset class with a potential new investor.
One question that is known, anecdotally, to come up is: ‘Why would anyone want to sell their life insurance policy?’
After all, in many countries in Europe, the Middle East and Asia, you can’t sell it, so those less familiar with the nuances of Grigsby vs Russell – and the multi-billion-dollar industry that the case created (albeit approximately 90 years later) – will not know this option even exists in the US.
So, trade group the European Life Settlement Association (ELSA, publisher of Life Risk News) has recently published Selling a Life Insurance Policy: Why and How, a ‘fact sheet’ that the organisation says is designed to help investors less familiar with life settlements understand exactly that.
The rationale behind highlighting the reasons why a policyholder sells a life insurance policy is twofold; the first one is of reassurance, as end investors less familiar with the life settlement market want to know that their underlying asset managers have the ability to execute their strategy in the medium to long term; life settlements are illiquid assets, and many of the funds in the market are closed-ended, private equity-style vehicles with a long duration. Asset managers are not paid to sit on cash, so investors want their money deployed.
Fortunately – for the life settlement industry – demographics are on its side. Every year, millions of Americans turn 65; a recent article in Axios says 4.1 million will do so in 2024, a record.
“It’s not that life settlement investors won’t look at a policy on a 64-year-old, for example,” says Rob Haynie, Managing Director at life settlement broker Life Insurance Settlements. “But mid-sixties is an approximate age where activity in the market starts to pick up because many of these polices on younger seniors are cheaper, so that’s the attraction for buyers at the younger end of the market.”
Regardless of age, Selling a Life Insurance Policy: Why and How cites four main reasons that account for deal flow in the industry’s secondary market: affordability, financial reasons, health reasons, and lack of need.
Health and financial reasons are the two reasons most often cited as providing a societal benefit, the other side of ELSA’s rationale for producing its latest fact sheet.
“Selling a life insurance policy can unlock capital to fund a wide range of spending. This includes healthcare, which provides a better qualify of life for seniors. But it also includes paying down any debt or providing a deposit for a house for someone’s children or dependents. All of these are benefits to society more broadly,” said Bryan Nicholson, Executive Director at US trade group the Life Insurance Settlement Association (LISA).
The biggest of the four reasons cited by ELSA in its fact sheet in terms of driving supply is lack of need, according to Haynie. However, he adds that there is a bigger picture to any conversation around the drivers of supply that a potential investor should be cognisant of.
“All these reasons are drivers of activity in our space, but lack of need is probably the biggest. But it’s also important to say that many seniors don’t even know about it. Think of a bridge – for every one person who crosses to the other side where the payout is, there are 6,000 that don’t even know the bridge exists,” he says.
Haynie’s comment segues into the ever-present challenge – and opportunity – that those in the life settlement space say is in front of them.
Every year, approximately 3,000 life settlement transactions are completed in the secondary market. Many in the industry express frustration that the number isn’t significantly higher; another ‘fact sheet’ published by ELSA in December 2023 claims that the value of all of the life settlement transactions by dollars was, at $4bn, just 0.64% of the value of all lapsed and surrendered policies in 2022 and that, “if the percentage value of all in-force life insurance in the United States that would qualify for the life settlement option were just 2%, then the life settlement secondary market could potentially be three times its current size in any given year”.
Efforts are underway to move the needle, both at the individual firm level and the industry level, mostly through trade associations like LISA in the US and ELSA in the UK. But for Haynie, the reasons why policyholders sell, and the persistence of those reasons, means that the runway for the industry remains long.
“The challenge our industry faces is not one of viability in the medium to long term. The reasons why an insured sells their policy have always been there and will always be there,” Haynie said.
“It’s an awareness issue. We want and need that 3,000 number to increase – that’s the rising tide that will lift all boats and the potential for that to increase significantly is the biggest reason why investors should be excited about this market.”
