Tuesday, September 22, 2009

More Americans cashing in on life insurance policies

life insurance

Many older Americans, who are strapped for cash and as anxious as the rest of us, are selling an unlikely asset: their life insurance policies.

The strategy, as it turns out, isn’t new. Once reserved for wealthy business executives who cashed in their company’s multimillion-dollar insurance policy when they retired, during the recession it’s become more widely used by policyholders.

Eric Bachman, founder and chief executive of Golden Gateway Financial, in Oakland, Calif., said the face value of life settlements reached last year was an impressive $13 billion.

Bachman recently spoke with Your Business about selling life insurance policies as an investment strategy and Wall Street’s keen interest in securitizing the life settlements.
One key piece of advice: Bachman said policyholders should work with a professional because as with any investment, there are pitfalls.

Q: Let’s start at beginning: What is a life settlement?

A: When someone chooses to sell a life insurance policy they can no longer afford or no longer need. They’re literally selling the policy. Say a large commercial investor buys the policy, then they become the beneficiary and continue to make payments (until the original policyholder dies). Interestingly, this has been a possibility for the past 15 to 18 years. It started as a rich person’s prerogative. Senior executives at big companies would retire and the company would have a $2 million policy on them. The companies would say: “Since you’re retiring, we’re no longer paying this, it’s yours.’’ These were big business people who had an asset they didn’t typically need because they had their own insurance. That has gone mainstream. Fifteen years ago, the average policy was $2 to $5 million. Now, it’s in the $150,000 range.

Q: Is this an option for anyone who has a life insurance policy?

A: Not every policy, but most types of policies can be settled.

Q: Who should consider a settlement?

A: If your kids are grown and on their own and you don’t need to worry about providing for them, if you’re aging and you can’t afford to keep the policy, For some people, it does get very expensive to maintain the insurance as they get older. For people who want to generate a lump-sum income, it’s an easy thing to do. Generally, the larger the policy and the older the policyholder, the greater percentage they’re going to get of that policy’s value. A good rule of thumb, on policies that have a surrender value, a person can get three-to-five times that surrender value. You’ll see the surrender value as part of the small print on a policy that says, if you turn this back in, we’ll pay you “x”. One of the little-known facts of the insurance industry, you never want to let your policy lapse because, at the least, you can turn it in and get some value for it.

Q: There’s a lot of buzz about securitizing life settlements as an investment opportunity. Why is this getting so much attention?

A: The central argument here is really one of greed. Is it inappropriate to look at a financial instrument as an investment? No. Would it be wrong if they were doing things that lead to downfalls? Absolutely. I guess the question is, should this be treated like another financial instrument that needs not only state regulations, but financial regulations? Every other sort of long-term financial instrument gets securitized at some point.

Q: If settlements have been around for so long, why are they getting so much more attention these days?

A: The natural progression and maturity of the industry has created the ability for the common person to enjoy the same benefit of someone who had a million-dollar policy. Another reason is financial need. People lost 40 percent of the value of their home. They lost 40 percent of the value of their stocks. Senior citizens who have a shorter time to recover need to look at the assets they have to create liquidity. For people who are looking for some means of liquidity, it’s an option they should consider. People look at selling life insurance as something morbid. From the perspective of the senior citizen, this is an asset they’ve purchased and the asset, at some point for them, has become devalued. That’s how it has to be viewed — they’re trading in one asset for another and that is cash. One of the concerns people have is their selling this and someone is going to make money when they die. If they’re selling to an unscrupulous person, there’s a danger. There are about 50 buyers we deal with. (Cantor Fitzgerald, Credit Suisse, JP Morgan Chase are among them.) There’s a high volume being settled. There was $13 billion of face value life settlements in 2008.