More seniors cash in life insurance policies
Mt. Lebanon insurance broker Howard Stern sees a bright future in the life settlement market as more senior citizens cash in life insurance policies.
Sellers earn a small percentage of the face value of a policy. Buyers, usually through large investment funds, continue to pay the premiums and collect the settlement when the seller dies.
For Stern, it's all in the numbers. By 2030, there will be more than 3.6 million Pennsylvanians who are 60 or older, up from 2.7 million last year, according to the state Department of Aging. There will be 88.5 million people 65 or older in this country by 2050, according to the Census Bureau.
“We're not close to reaching the saturation point, and it remains an attractive option for more policyholders,” said Scott Hawkins, a vice president and analyst with Conning Research and Consulting, a Hartford, Conn.-based asset management firm that reviewed the industry for a Securities and Exchange Commission task force that released a 93-page report in 2010.
Investments in that market have been lucrative. Allegheny County's pension fund has made $13 million; Westmoreland County's has made $5 million.
“What I like best about it is it's not correlated to the stock market. It's been a steady performer for us,” Westmoreland Controller Jeff Balzer said.
Investors funneled more than $12 billion into the industry in 2008, but the economic downturn pushed life settlement investments down to about $1 billion last year.
“After the financial crisis, the market flipped, and there was a significant fallback in capital,” Hawkins said.
Hawkins said the market began to bounce back last year. Conning estimated that the market, in the face amount of life insurance settled, would grow to $90 billion to $140 billion by 2016.
Stern, a broker with Selario Insurance, said sellers earn between 5 and 15 percent of a policy's total worth. The payout exceeds the policy's cash surrender value but is less than the expected payout for a death.
“This is a good investment for people who don't need the insurance or can't afford the premiums,” Stern said. “There are a lot of reasons people do it. It's not just purely a numbers issue. It's a choice.”
Insurance officials in Pennsylvania, one of 46 states that regulate life settlements, warn consumers about the risks. It is tempting for retirees looking for cash to bolster fixed incomes, “a potentially vulnerable group,” said Roseanne Placey, a spokeswoman for the state Insurance Department.
The American Council of Life Insurers says life settlement offers are a poor choice for policyholders.
“Life insurance is not intended as an investment, and we strongly oppose transactions that evade state insurable interest laws solely to benefit investors,” spokesman Steven Brostoff said.
Stern said the face value of policies ranges from $100,000 up to millions of dollars. The SEC task force said policies typically exceed $1 million.
Experts said those best positioned to take advantage of the market are clients, typically older than 70, who hold universal life insurance policies, which earn value the longer they are held. Premium and excess payments increase the death benefit.
“It's providing an option for seniors with life insurance policies to see if they have any economic value,” said Darwin Bayston, president of the Life Settlement Association, an Orlando-based trade organization. “There is no one place where all the transactions are recorded. We don't know what the volume is.”
William Corry is general manager of Corry Capital Advisors in Pittsburgh, which invests in life settlements for Allegheny and Westmoreland counties. His funds generally purchase policies from individuals older than 80 with policies of at least $1 million.
Most live in California or New York. Many are wealthy and hold multiple policies and other investments. Some have no heirs.
One national firm looking to buy policies uses a television commercial starring 91-year-old actress Betty White in a pitch to seniors who are thinking about letting their policies lapse to cut expenses. White advises “keep retirement hot” and use the cash for some fun.
Westmoreland County's retirement board has about $21 million of its $359 million pension fund invested in the market, with Allegheny County's using more than $28 million of its nearly $645 million fund.
Allegheny County invested $10 million in 2009, said Edwin Boyer of Asset Strategy Consultants, a consultant for its pension fund. The board decided to invest another $5 million in December.
Beaver County officials, who have invested in the funds, declined to comment until their retirement board meets on Wednesday. .
The SEC task force recommended legislative action to regulate the industry and to identify insurance policies as securities. Congress has taken no action. That leaves market participants without the protection of federal law against excessive commissions or failures by settlement brokers or providers to obtain the best price for a policyholder, the task force said.
The SEC has brought a number of enforcement actions alleging fraud in life settlement investments, and “the schemes in these cases ranged from tens of millions of dollars to at least $1 billion,” according to the task force.
Rich Cholodofsky is a staff writerfor Trib Total Media. He canbe reached at 724-830-6293or firstname.lastname@example.org.