Financial security in retirement for many is a precarious concept. According to Annuity.org, the average American woman retires with just $57,000 in savings. It’s double that for men at $118,000. But, given the average American retires at almost 67 years of age and lives to be almost 77 years old, that nets out to $5,700 per year for women and $11,800 per year for men.
That’s not a lot. Clearly, America, like many (all?) western countries, faces a critical societal challenge for its citizens in in their autumn years because they will likely need to secure additional and alternative funding options for their retirement.
For a certain segment of the population – those with a life insurance policy – there is one often underutilised option. It’s called a life settlement. And for investors that strongly consider the ‘S’ leg of the ESG stool when allocating to alternative investment products, the life settlement sector says that their corner of the world aligns strongly with the ESG movement.
“There are all sorts of reasons that people need to turn to life settlements,” said Rob Haynie, Managing Director at Life Insurance Settlements, Inc., a broker that represents sellers of life insurance policies. “The most common occurrences include paying medical bills or retiring debt. The costs of long-term care in the United States are exponentially increasing; the system is at a breaking point. Many seniors are already struggling to fund their retirement.”
Many scoff at the notion that allocating to life settlements can support an ESG mandate. However, Jonas Martenson, Sales Director and Founder at Stockholm-based life settlements investment manager Ress Capital says that in Europe particularly, the ESG conversation comes into the due diligence process rather quickly.
“Pension plans in Europe won’t invest in hardly anything without the approval of the ESG committee,” he said. “So, we have the ESG conversation at the start because investors don’t want to waste their time on a due diligence process only to find that the investment strategy doesn’t align with their ESG policy.”
Life insurance policies in the United States are considered property, and thus can be sold by the policy owner. Indeed, every life insurance policy has a ‘surrender value’ which is a price that the life insurance company that underwrites the policy must pay the individual when that person surrenders their policy (assuming that the premium payments are up to date). Selling a policy on the secondary market, however, could net the individual a significantly larger sum; according to the Life Insurance Settlement Association, up to 7.8 times as much on average.
The problem is that many Americans do not do that. They simply stop paying the premiums, in which case the policies lapse (after a certain grace period) and they get nothing, or they take the cash surrender value of the policy, when they could have potentially received much more.
The Association of Life Insurance Companies (ACLI)’s Life Insurer’s Fact Book 2021 says that the lapse rate – the percentage of insurance policies that expire each year without a settlement figure being paid, usually due to the insured individual ceasing to pay the premiums – of an individual life insurance policy in the United States in 2020 was 4.1%; it’s been above 4 since 2011 and was 5.4% in 2010. Additionally, total life insurance in force at the end of 2020 was $20.4trn.
Life settlements don’t pay par of course, due to these investors assuming responsibility for paying the premiums until the policy matures. But even using a conservative valuation model, this is billions of real monetary value that American seniors are potentially missing out on each year. And therein lies the opportunity for life settlements to be a continued ally to the ESG movement. Martenson says that this is the key conversation point that supports the alignment of interests between ESG and life settlements.
“One of the biggest constraints when it comes to the growth of the life settlements industry is the lack of awareness amongst the population with regards to this even being an option,” he said. “Life insurance companies are not informing the policy holders that they have the option to sell their policy for a much greater sum than they would get from the surrender value, so people are lapsing their policies and getting zero.”
The life settlement industry is heavily intermediated – two brokers are involved in every transaction. One works on behalf of the individual policy owner, which sells the policy to one that works on behalf of the investment manager before the manager eventually takes ownership. Haynie says that a significant part of the industry is already ESG-friendly.
“We have a fiduciary duty to our clients to secure the highest possible price for their policy,” he said. “Selling a policy involves a process that is well established with a focus on consumer protection. It is worth noting that life settlement market participants have received zero consumer complaints in the last five years. I am unaware of any other financial services market with zero consumer complaints. This is in part because every time we sell life insurance policy, the consumer gets more than they would have received if they had taken the surrender value from the carrier (the insurance company) and the maximum that they were able to get at the point of sale. Not only that, but it’s a non-binding sales process; it puts the consumer in the best position. Sometimes it’s worth selling, sometimes it’s a benefit to them to keep it. Life settlements is naturally aligned with ESG at both a micro and macro level here.”
A 2019 survey by Netherlands-based investment manager NN Investment Partners asked institutional investors which out of E, S or G offered the best opportunity to generate returns; E was the overwhelming favourite at 66% and S came in last at 15%. It’s difficult for a life settlements investment manager to make the case for the E, unless they hold the life settlement rights to the insurance policies of a bunch of CEOs of clean energy companies. But it’s not impossible.
“Life settlements tends to fit into the social in ESG but in our industry, buying life insurance policies has no carbon footprint. We’re just emailing lots of documents and having phone calls so the environmental consequences of what we do are pretty much zero. And again, from a governance perspective, life insurance companies don’t have a fiduciary duty to the insured people to make them aware of this and so we’re improving governance in a market by making it more transparent and getting policyholders more money than they would have got otherwise,” said Martenson.
Even so, S is where life settlements naturally align to the ESG movement. But whilst recent events in Ukraine have showcased the value of the ‘S’ exposure in a diversified portfolio to a much greater extent, many other investment opportunities are available to investors to scratch their social investing itch, such as real estate with social housing, not to mention allocating to more diverse and women-owned investment managers of all strategies. Whether the life settlement industry can get a seat at the table remains to be seen.
“We need to educate investors about the asset class because it’s still an unknown asset class,” said Martenson. “The risk characteristics of life settlements are extremely interesting for long term investors, and we need to continue to argue for the fact we are sustainable. If life settlements didn’t exist, the consumer would have to sell at a lower price. Life settlements offer a clear social good and by extension that social benefit is shared by investors as well. Articulating this both to policy owners and investors is our next challenge.”