A Perspective on the Growing Controversy of Life Settlements

Life settlements continue to generate controversy, but continue to be popular, viable solutions for some of today’s consumers.

As we know, life settlement buyers, often a group of investors, become the new beneficiaries of the policies. The buyers pay the premiums to keep them in force until the insured dies. Then they collect the death benefit.

The life settlement industry started gaining momentum in the late 1990s and no amount of negative publicity appears to stop its growth. Industry experts predict the life settlement market will eventually hit $160 billion.

But as far back as 2001, life settlement companies have been under heavy fire from consumer advocates and even from within the insurance industry.

First you have the consumer groups. Consumer advocate Gloria Wolk described the industry as a haven for scammers with only a handful of trustworthy companies. In addition, Wolk said sales agents have the propensity to inflate the benefits of life settlements.

In 2005, Massachusetts Mutual Life Insurance released The Life Settlements: An Actuarial Perspective on Consumer Economic Value, a study on life settlements’ impact on policyholders, target markets, life insurance beneficiaries, financial advisors, insurance regulators, and the future of the Life Settlements industry.

The report concluded that those who benefit from life settlements are limited to a smaller market than perceived. The study also revealed seniors who sold their life insurance policies to a life settlement firm received only 20% percent of the face value vs. the intrinsic value of the policy (around 64% of the face value).

Then others joined in. In 2006, the National Association of Insurance Commissioners (NAIC) took a stand against the emerging market. In February 2007, the National Association of Insurance and Financial Advisors (NAIFA), the Association for Advanced Life Underwriting (AALU) and the American Council of Life Insurers (ACLI) launched an offensive against life settlements particularly the Stranger-Originated Life Insurance (STOLI) or the Speculator-Initiated Life Insurance (SPIN-LIFE).

But what about those in favor of life settlements and their benefits? Supporters of the life settlement industry say it’s time to fight back by spreading the truth about it. Michelle Moloney, Vice President of Corporate & Strategic Development for Transamerica Reinsurance said life settlements are a step in the progression of the life insurance industry.

According to Moloney, life settlements present insurance carriers with another opportunity to meet the needs of consumers. If these needs change, the industry should change as well.

The consumer demand behind the growing life settlement industry isn’t going away. The best thing life insurers can do, according to Moloney, is to actively participate in the life settlements market and provide it as a better alternative to consumers and themselves.

For Transamerica Reinsurance president Paul Rutledge, the bottom line on the life settlement issue is that consumers should be able to get benefit from their insurance policy’s economic value in the marketplace. As for its unsavory status Robert Nelson, Grace/Mayer Insurance Agency, Inc’s vice president of financial and estate planning said the first order of business is distinguishing life settlements from STOLIs and SPIN-LIFE.

Nebraska Insurance Commissioner Tim Wagner and NAIC member called STOLI the dark side of life settlements. Unlike life settlement sales, some financial companies target insurable people with short life expectancies who agree to sell their policies.

Quantum Insurance Design national sales director Michelle Olmstead warned abusive sales strategy employed in marketing STOLI threatens the legitimate life settlement industry and called for more regulation.

Ironically, many life settlement practitioners say industry regulators and other policymakers are coming out with proposals that not only fail to tackle the core of the STOLI problem but also impair the legitimate life settlement market by making it inaccessible to consumers.

However, the fate of the life settlement industry shouldn’t be left in the hands of regulators. Nelson called on companies and financial advisors to step up and do their share in cleaning up life settlement industry’s bad boy image by maintaining high standards in practicing the trade.

He warned against the danger of over regulation if companies and practitioners started dabbling in STOLI schemes to cash in on the US target market that research firm Conning & Company estimated to be worth $492 billion. While the temptation is there Nelson cautioned STOLI could eventually trigger the collapse of the industry.

Instead, life settlement practitioners should take an ethical stand to remove any misgivings about the industry. This industry has evolved into one of respect, said Nelson and those who involved in it who deserve respect do not victimize senior citizens with crooked transactions.

Life settlements are a valid, consumer friendly option for people who decide they have policies they no longer need or cannot afford to keep in force. That message plus a strong ethical backbone could finally give life settlements the positive image it deserves.