How Did Insurance Policy Owners Earn $848 Million in 2020?

Oct 6, 2021 9:10:00 AM / by LISA

It’s true—according to “The Life Settlements Report” released by The Deal, 3,241 people sold their life insurance policies in 2020 for a combined total of over $848 million. It’s a staggering number, and despite the societal impacts of the  COVID-19 Pandemic, it represented a significant increase over the amount that was sold the year prior.

Why Was There an Increase in Life Settlements?

There are a couple of reasons that point to this rapid increase. First, more people are becoming seniors, as the large baby boomer generation reaches that milestone. Second, policyholders are recognizing how lucrative life settlement earnings can be. The report noted that the average sale in 2020 was 20% of the policy’s value; but some sellers reported earning as much as 52.8% of the face amount. Like real estate, policies are garnering unheard of returns.

And there is room for growth. An astounding 92% of life insurance policies end without paying out a death benefit, meaning they were surrendered or lapsed due to an inability to pay or disinterest in paying the premiums. This is leaving significant amounts of money on the table. In fact, it’s more than $100 billion

This trend is expected to continue. Forbes tells us that by 2030, Americans age 65-plus will comprise 21% of the population; in 2019 that number was 16%. Additionally, continued inflation worries [link to inflation blog]and possible tax increases might drive retirees to tap unwanted life insurance policies for cash. Finally, since the life settlement returns are not tied to the economy or the fluctuating bond and stock markets, many investors see it as an alternative asset class with the potential for higher returns.

What Were Policy Owners’ Motivation to Sell?

There are a number of reasons why these policy owners sold, and they continue to be strong motivating factors for the future. Many recognized that eliminating the high premium payments is a smart financial move that frees up their cash flow. Additionally, they realized that they’ll receive much more money than the cash surrender value—and of course more than zero, which is what they would receive by allowing the life insurance policy to lapse.

Their needs ranged from wanting to help with grandchildren’s education, to paying for a new home, to funding long-term care, to covering medical costs, to helping with a divorce, to taking trips, to purchasing other investments, to overcoming bankruptcy, to donating for a cause, to eliminating debt and many more. Some couldn’t afford the premiums and wanted to avoid a lapse. Some wanted to free themselves from policies that were no longer relevant or needed. The bottom line is that they recognized that their life insurance policy was an important asset that they could leverage.

Tight Life Settlement Regulations Drove Growth in the Industry 

Another important factor that motivated policyholders to sell are the increasingly tight state regulations governing the life settlement industry. Since the recession of 2088 and the ensuing financial fallout, financial regulation has increased across all sectors. In the life settlement industry, this has benefited the policyholder in many ways. In fact approximately 90% of the U.S. population is protected by comprehensive life settlement laws and regulations—one of the most strictly regulated financial transactions in most states now.

Some life settlement regulations requirements include:

  1. Licensing and oversight of providers and brokers
  2. Competency certification
  3. Privacy protections 
  4. DOI form approval
  5. Extensive consumer disclosure mandates (including disclosure of alternatives and of tax, legal, and other implications) 
  6. Reporting requirements 
  7. Rescission periods
  8. Funding requirements
  9. Beneficiary acknowledgement

With this much momentum in the industry, it makes good sense for policyholders 65 and older to consider a life settlement. Since it is in their best interest in many instances, we encourage you to have that conversation with your clients as well.

Questions? Reach out to LISA

Tags: Financial Advisors, life settlement, Life Insurance Settlement, Life Settlement Provider

LISA

Written by LISA