Consumer awareness in the secondary life settlement market is a perpetual hot topic in the industry. Greg Winterton spoke with Michael Freedman, CEO at life settlements provider Lighthouse Life, to get his take on the current state of consumer awareness in the space and what could be done to improve.
GW: Michael, let’s start at the beginning. If you were grading the current state of consumer awareness in the space, what grade would you give, and why?
MF: Greg, thanks for the opportunity to share some thoughts related to consumer awareness in life settlements.
Consumers’ – particularly seniors’ – awareness about their right and ability to sell their life insurance policies has risen in recent years largely as a result of advertising by life settlement companies directly to consumers (DTC). More seniors today than, say, a decade ago, know that selling their life policy is a more valuable option than lapsing or surrendering it because they’ve seen a television commercial, an advertisement when they are browsing the internet, or received direct communications via email or direct (snail) mail.
Likewise, perceptions about life settlements among seniors seem to have improved. This is again a result of advertising about life settlements, but also because the tens of thousands of seniors who have sold their policies over the past decade have had a valuable and positive experience. That said, many people still don’t know much about what is involved in selling a policy. They may not think a life settlement applies to them or their personal or financial circumstances, or know how much their policies are worth, or be aware that consumers can be confident when selling a policy because the market is broadly and heavily regulated.
There’s still vast room for advancing both general awareness and perceptions about life settlements. There are an estimated eight10 million seniors each year who will lapse or surrender a life policy over $100,000 that could have qualified for a life settlement (according to Conning), compared to the approximately 3,000-plus settlements that were transacted in 2021 and 2022 respectively.
Likewise, the senior population in the US will double over the next 15+ years. A majority of seniors own a life policy, and a vast majority of those seniors will lapse or surrender their policies. Now is the time to make further strides in consumer awareness and perceptions about life settlements and DTC will lead that charge.
GW: Americans with a life insurance policy that qualifies for a life settlement have other options available to them to access capital, including reverse mortgages. Why life settlements?
MF: Seniors who have a life policy and a need for that policy in order to protect loved ones or business interests, or to preserve assets, should try to keep their policy if they can. Life settlement companies are already required in most states to advise the seller to explore ways to keep the policy. (It’s worth noting that a few states require policyowners who are planning to surrender or lapse their policies to be made aware of the life settlement option). A reverse mortgage is something that seniors who own homes can and should consider as well to meet their retirement needs.
But, if a policy has become too expensive to maintain, or if the owner of the policy has to access other resources to meet needs in retirement, it makes sense for the senior to explore a life settlement. A life settlement will always be worth more – usually multiples more – than if they lapsed or surrendered the policy. Seniors report that they most often use their life settlement proceeds for retirement investments, or to pay medical bills, or just to live on.
There have been comparisons between life settlements and reverse mortgages because both involve seniors and an asset they own. But that comparison does not go beyond that. There are significant differences and reverse mortgages should not be a compared to a life settlement. A reverse mortgage, for instance, is a mortgage – a loan – that typically incurs interest and other charges and costs. There are other conditions and restrictions in reverse mortgages that can negatively impact government assistance for retirement and health care.
A life settlement, by contrast, is not a loan, and there are no on-going fees or costs that might incur to the seller after the sale of their policy. A life settlement pays the senior a lump sum payment – money that can often be used to help the senior stay living in their home for the rest of their lifetime.
GW: Life settlement market participants frequently point to the growth of the direct-to-consumer segment of the market as one that is driving growth in policy sales. What’s your view on DtC?
MF: A fully functioning life settlement market has the capacity to be over two times larger than residential real estate. As the reverse mortgage market has peaked in the past few years, life settlements will continue to grow and will far exceed that market.
But there has not been much growth in life policy sales over the past several years, with life settlement companies reporting about 3,000 settlements in each of 2021 and 2022. What is interesting, however, is that those companies engaged in DTC have actually increased their share of the total life settlement market, suggesting that this channel is one that has significant potential to contribute to future growth.
Also noteworthy is that the average size of the life policies purchased over the past two years was approximately $1.5m. Yet the average size of a policy owned by a senior is just over $100,000. Again, this is good news for the DTC efforts of life settlements. The market can grow to capture more of the nearly 10 million seniors each year that are going to otherwise lapse or surrender their average sized policies. The current market leaders in DTC can be joined by others to “grow the pie” as the market for life settlement grows.
GW: What about the intermediated universe? Are there any subsets of this segment of the space that are responsible for either increased – or decreased – demand?
MF: The rising tide lifts all boats.
At the outset of DTC marketing in life settlements a few years ago, there were some fears (and grumbling) that consumer direct advertising would hurt the intermediary businesses of settlement brokers. The notion was that seniors would opt to go direct to providers. Those fears have been proven to be unfounded.
Increased consumer awareness has benefited intermediaries like settlement brokers, but also insurance producers, financial planners, advisors and others. Greater awareness has led to greater acceptance among insurance and financial advisors and their firms. Seniors are asking their advisors about life settlements because they saw an advertisement on television.
GW: Lastly, Michael, is there any low hanging fruit here that, if picked, would significantly accelerate the volumes of deals conducted in the secondary market? Or is it a case of ‘keep on keepin’ on’?
MF: I don’t know if it’s low-hanging fruit, per se, but let me summarize what I’ve tried to get across.
The opportunity for the life settlement market is vast and growing. The supply of policies can increase substantially. Strides have been made to reach seniors through DTC marketing and advertising, but these strides are only really the beginning of what can and should be done to unlock the value of life settlements for seniors, market participants and investors in the assets.
Michael Freedman is Chief Executive Officer of Lighthouse Life