What’s Trending in Life Settlement Transactions? Term Policy Conversions

A unique advantage of having spent more than 20 years as a life settlement broker is the opportunity to recognize trends involving policies sold in the secondary market.

While Universal Life policies (UL, VUL, IUL, or GUL) remain the target market for most secondary market acquisitions, recently we’ve noticed an increase in the number of policy owners who are opting to convert and sell term life policies rather than allowing them to expire.

This article explores some of the potential causes for this trend and explains how policy sellers and their agents are benefitting from term conversion life settlements.

Aging clients with term life policies

If you are a financial advisor or insurance professional, chances are you have a number of aging clients who own term life insurance policies. Many individuals who purchased term insurance 10, 20, or 30 years ago, were attracted by its affordability for temporary coverage for a specific need. Examples include:

• Until the business owner retires or sells the business
• Once children have graduated from college or are financially secure
• To cover business debt that matches the amount and length of the loan
• For income replacement or to cover personal debt
• To fund a buy-sell business agreement

But what happens when the temporary need has been satisfied and the policy is near the end of its term?

The good news is that your clients may have an opportunity to sell the policy and recover a substantial portion of their investment.

The life settlement process for convertible term policies typically begins several months prior to the end of the term.  Once we’re contacted by the client’s agent, we begin the pre-qualification process involving the insured’s age, health factors, life expectancy, premiums for the new UL policy, etc. The goal is to complete the underwriting process within the conversion window and then submit the new UL policy to multiple buyers in the secondary market.  We negotiate with buyers to generate multiple offers until the highest market value is received for the policy.

Success Stories: A win-win for the client and the agent

Financial professionals have an opportunity to deliver added value to clients who own term policies by helping them recoup a substantial portion of their investment.

Many of the agents we work with encounter potential life settlement cases during the course of annual policy reviews or financial planning meetings.

A sampling of our term conversion life settlement cases includes the following success stories, most of which may be accessed on our website at: https://assetlifesettlements.com/success-stories.html

• Senior sells $1.5M term policy for 45K
• CFP Walks the Talk; Sells His $2.8M term policy for $60K
• Cancer diagnosis motivates senior to sell $1.8M term policy for $350K
• Retired business owner sells $2M term policy for $600K
• Senior nets $880K after selling $3M term policy
• Senior sells $5M term policy for $510K
• Registered rep recommends client sell $1M term policy for $172K
• Selling $500K term policy for $80K helps pay for Alzheimer’s care
• Business receives $161K after selling $1.5M key man term policy

For many clients, the cash windfall they receive from selling an expiring term policy is a stunning surprise and often financially transformational. In every single transaction, the client is extremely grateful to the agent who spearheaded the solution.

For the insurance professional, the financial reward is also significant. The licensed agent has an opportunity to earn a commission on the UL conversion as well as receive compensation based on the life settlement transaction.

Looking Ahead

While it’s impossible to predict whether the trend we are seeing will continue, there are a number of factors that will play a role.
Chief among them is the need for broader public awareness of the life settlement market.

This includes the extent to which financial professionals embrace life settlement transactions as a viable strategy to optimize the value of expiring term policies. In many cases, it’s their fiduciary duty to do so.

Considering the sheer volume of term life insurance that has been sold each year, the future need for advisors to facilitate term conversion settlements seems likely. According to the 2022 Life Insurers Fact Book, individuals purchased $1.4 trillion of term insurance, or 71% of the individual life face amount issued. Interestingly, only a small fraction of that coverage will pay a death benefit. A study by Penn State University found that only 1% of term life policies result in a death claim because most term policies are allowed to lapse before the end of term.

Another factor that will likely have an impact on the life settlement market is the growth of online content involving the life settlement market, and specifically the ability to sell a term policy.

Driving this assumption is a study published in 2002 by the Journal of Political Economy entitled “Does the Internet Make Markets More Competitive?”  The study noted how Internet comparison shopping sites affected the price of term life insurance sold in the mid-late 1990s. The results showed that increases in Internet use significantly reduced the price of term life insurance by 8 to 15%.

Next steps

The first quarter of 2023 is a perfect time for financial professionals to reach out to retired clients and offer to review their continuing need for term life insurance coverage.

The ability to receive a substantial cash windfall for a term policy that is nearing expiration is clearly in the best interests of your clients.

Call us at 855-768-9085 to discuss your questions. We’ll be happy to provide an immediate pricing analysis.