Life Settlements: Discover Your Client's Unknown Asset

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1 Life Settlements: Discover Your Client's Unknown Asset MODERATOR Darwin Bayston, CFA President and CEO Life Insurance Settlement Association PANELISTS Michael Freedman President GWG Life Dan Young Vice President, Portfolio Management Vida Capital

2 Life Insurance Settlement Association History Established in 1994, the Life Insurance Settlement Association is the oldest and largest trade organization in the life settlement market. Goal Educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy.

3 Life Insurance Life insurance is a core part of U.S financial landscape Alleviates financial risks of premature death An Investment

4 Options for an Unwanted Life Insurance Policy Accelerated death benefits Assignment of the policy as a gift Replacement Conversion of the policy from a term policy to a permanent policy Conversion of the policy to obtain a long-term care health insurance coverage Maintenance of the policy through loans using the policy or its cash surrender value as collateral Maintenance of the policy through a life settlement contract The sale of the policy pursuant to a life settlement contract

5 Life Settlement A Life Settlement is the sale of life insurance policy to a third party: The seller receives consideration (cash or retained death benefit) The buyer pays all future premiums The buyer receives es the death benefit

6 Case Study #1 Vida Policy Case Study 1 Policy Holder Male, Age 81 Policy Face Value $1,470, Premiums $71,478 Cash Surrender Value (CSV) $53,010 Settlement Price $249,050 Gross Excess Benefit: $196,040 o o Average price paid by purchasers in the life settlement market exceeds 4x cash surrender value 2 40% of Seniors over 65 have allowed a policy to lapse; 90% of those would have considered life settlements had they known about the option 3 1. Actual policy purchased and currently owned by the Fund with characteristics that meet the Fund s eligibility criteria. The illustration above is provided for exemplary purposes only. The benefit to insureds can vary widely, and there is no assurance that all life insurance settlements will have similar excess benefits to insureds. 2. Empirical Investigation of Life Settlements: The Secondary Market for Life Insurance Policies, Januário and Naik Insurance Studies Institute, 2010

7 Case Study #2 Policy Owner Year-Old Male Policy Type......Term Convertible Annual Premium $113,024 Face Amount $2,840,000 Cash Surrender Value $0 Settlement Amount $120,000 Know your choices with Term Life Insurance Term Conversion Commission: $101,000 (at 90% of 1 st yr premium) Life Settlement Compensation: $28,400

8 Case Study #3 Policy Owner..... Married Couple Policy Type.... Joint Survivorship Annual Premium $51,000 Face Amount $1,000,000 Cash Surrender Value $0 Settlement Amount $20,000 *Benefits Kept $200,000 We were able to get cash now, and still maintain a benefit for our family with no further obligation. Anne & Edward K. *NO FURTHER PREMIUM PAYMENTS Life Settlement Compensation: $10,000 8

9 Why Does the Market Exist? Seller Benefits: Better economic alternative than lapsing or surrendering policy Average purchase price in settlement market greater than 4X of cash surrender value Avoidance of policy premiums Cost of Insurance (COI) increases in later years Liquidity needed elsewhere: healthcare, general retirement expenses, etc.

10 Market Opportunity LIFE INSURANCE MARKET $11.4 TRILLION Individually Owned $639.3 BILLION Lapsed & Surrendered $8.215 TRILLION Group Owned $497 BILLION Lapsed & Surrendered American Council of Life Insurers Fact Book 2014 MILLIONS SENIOR POPULATION US Census Bureau Projections: US Census Bureau 65+ Population Projection

11 Lapse Supported Pricing The current environment suggests that if an issuing company does not provide fair value, policyholders will proceed directly to a secondary marketpresumably, a viatical company-to get a better deal. There will be a secondary market for these contracts, and this will not be good for the life insurance industry. William C. Koenig and Stephen H. Frankel, Northwestern Mutual Life Insurance Co., Milwaukee, WI - Source: A.M. Best, Best s Review, June 2000

12 Lapse Rates Billion of policies are lapsed each year Because Consumers and Advisors Are Unaware Seniors 65+ $57 billion of Face Value by lapsing or surrendering (Universal and Variable Universal Life Policies) $112 billion of Face Value by lapsing or surrendering (Universal, Variable Universal, Term and Whole Life Policies) Source: (LISA/Welcom Funds Study Feb 23, th Annual Institutional Investor Conference)

13 Market Opportunity CONNING RESEARCH 2014 $3 BILLION $180 BILLION ESTIMATED FACE AMOUNT OF POLICIES SOLD ESTIMATED POTENTIAL SIZE OF MARKET

14 Preserving Property Rights U.S. Supreme Court Grigsby v. Russell, 222 U.S. 149 (December 4, 1911) So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property To deny the right to sell except to persons having such an interest (in the life of the insured, emphasis added) is to diminish appreciably the value of the contract in the owner s hands. ~Justice Oliver Wendell Holmes

15 A Well-Regulated Market 42 STATES NOW REGULATE LIFE SETTLEMENTS Representing over 90% of the U.S. population states regulated states regulated

16 A Well-Regulated Market 48 STATES REGULATE INVESTMENTS IN LIFE SETTLEMENTS AS A SECURITY UNDER STATE SECURITIES LAWS AND SO DOES THE S.E.C. Life Settlements Task Force: Report to the United States Securities and Exchange Commission (July 22, 2010)

17 Protecting Consumers FOUR reported consumer complaints since 2011 ACCOUNTABILITY TRANSPARENCY PRIVACY PROTECTION Source: National Association of Insurance Commissioners Consumer Information (February 23, 2015)

18 Need for Awareness 55% of seniors have lapsed a life policy (ICR Life Insurance Study, 2013) 90% of seniors who lapsed a policy would have considered a life settlement had they know of the possibility (ISI Institute, 2010) 79% of clients feel advisors should inform them about a life settlement (ICR Life Insurance Study, 2012) 49% of advisors cite lack of knowledge as reason for not recommending life settlement to clients (ISI Institute, 2010)

19 Reality - Financial Crisis Unknown cost of health care in final years Seniors fear being broke more than fear death Which do you fear more? Age Running out of Money, 61% Death, 39% Source: Allianz Life Insurance

20 STATES ENDORSING LIFE SETTLEMENTS State lawmakers are encouraging elderly residents to use life insurance as a way to pay for long-term care and lower the Medicaid tab in the process. Wall Street Journal. States Ease Use of Life Policies for Elder Care. June, 17, 2013.

21 DUTIES OF PROFESSIONAL Certified Financial Planner (CFP) DESIGNEES Standards of Professional Conduct; Rules of Conduct 1.4: a certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board. Chartered Financial Analyst (CFA) Code of Ethics and Standards of Professional Conduct I.A.: Knowledge of the Law III.A.: members have a duty of loyalty to their clients and must act with reasonable carte and exercise prudent judgement; must act for the benefit of their clients and place clients interests before their employer s or their own interests.

22 Certified Investment Management Analyst (CIMA) Code of Professional Responsibility each professional shall always place the financial interests of the client first. all recommendations to clients and decisions on behalf of clients shall be solely in the best interest of the client. Standards of Practice DUTIES OF PROFESSIONAL DESIGNEES Responsibility to maintain competence. Responsibility to keep client s financial goals their highest priority. All recommendations must be made solely in the client s best interests. Chartered Life Underwriter (CLU) & Chartered Financial Consultant (ChFC) Code of Ethics, Professional Pledge I shall render that service which, in the same circumstances, I would apply to myself.

23 Questions? PANELISTS Michael Freedman President GWG Life Dan Young Vice President, Portfolio Management Vida Capital