Life insurance customers are selling their insurance policies in much greater numbers, and a few companies have decided to quit fight-ing the trend and start profiting from it, according to Conning Research & Consulting.
The Hartford-based firm’s latest report says that 2007 was a huge year for life insurance settlements, which occur when policyholders decide to sell their policies to a third party. That year, about $12 billion worth of U.S. life insurance face values were settled; in 2006, that number was only $6.1 billion.
And life settlements are likely to get even more popular, says Scott Hawkins, a Conning vice president. The rough economy has prompted more policyholders to sell unwanted policies to get money immediately. Also, the report found, interest has grown simply be-cause more people are aware of the option.
Conning estimates that the amount of life insurance settlements will rise to $21 billion in 2012 before the market for such policies slows down, Hawkins said.
Three companies – Transamerica, Genworth Financial and Hartford-based The Phoenix Cos. – entered the life settlement market in 2007 and 2008 after deciding to work with the trend, rather than resist it.
Darryl Glatthorn of Westport, Conn.-based Equus Financial Consulting, says investors, too, are increasingly attracted to life insurance policies.
As the financial world reels from fallout of highly leveraged investments, life settlements are a relatively non-levered, stable bet.
“It’s the kind of breath of fresh air that people are looking for,” he said. Right now, supply of these policies outstrips demand – but when the market stabilizes, life settlements are likely to become more popular.
This might get a mixed reaction from life insurers themselves.
Insurers tend to get nervous about life settlements, Hawkins said, because they’re often lumped in with what is popularly known as “Stranger-originated life insurance,” where brokers sell policies to the sick or elderly and then steer them to re-sell those policies to third parties soon after.
That practice is, at best, legally problematic and much frowned-upon by regulators. However, most life settlements are a “whole other kettle of fish,” he said, and completely above-board.
But beyond the whiff of shady entanglements, there’s a financial reason for life insurers’ wariness: Insurers rely on “lapse assumptions” – the expectation that a certain percentage of customers will let their policies lapse, and the company will keep all the premiums without having to pay a death benefit. If more people are selling their policies, they aren’t letting them lapse, and the company loses that ex-pected money.
Some insurers, though, have realized that policyholder demand for settlements is rising, and they’ve decided to capitalize on it. Insur-ers themselves are offering to buy up these policies, so they hang on to part of the payments after the policyholder dies.
In another variation, insurers offer to make the policyholder a loan that is greater than the cash value of his or her policy, which allows the company to make interest on those loans.
Whichever way the companies are choosing to structure these plans, Hawkins said, often they’re deciding that offering up settlement options is just good customer service.
“Why not offer a service that [policyholders] want? They may buy another product from you.”
