Life settlements without medical underwriting
By Roccy Defrancesco
The Wealth Preservation Institute
To say that the life settlement (LS) market has gone through some changes over the last 12 months would be an understatement. Only a little while ago, there were buyers standing in line to buy polices for amounts up to 30 percent of face value (the death benefit of the policy). Now the line is a lot shorter and many firms have figured out that the life expectancy reports from policies previously purchased may have been a bit optimistic (meaning the life expectancy is actually a bit longer than the buyers calculated).
Today, offers are more in the range of 12 perfect to 15 percent of face value for your average LS sale.
LSs are not the easiest sale. Traditional LSs take a lot of work and time to "close." That's one reason many advisors shy away from them. Traditional LSs require medical underwriting -- a process that takes six to eight weeks even to find out if a "good" offer is going to be given to your clients.
LS with no medical underwriters and no LEs. If I asked you what would be the perfect LS situation, you would likely say one without medical underwriting. Well, guess what... such a program recently came into the marketplace. What does that mean to you? Opportunity. Now you can go to clients and tell them, for certain, that you can obtain a financial offer for their life policy. As I said previously, with a traditional LS, you have to go in to underwriting and wait to see whether an offer comes. This new program will open up an LS market for advisors looking to expand their business (i.e., make more money) and help out more clients.
What kind of policies can be sold through this no-underwriting program? Both non-convertible yet renewable convertible policies; the non-convertible, renewable policies must renew to age 90 with five years remaining on the level term period. It really is just that simple.
How can buyers justify buying policies with no underwriting?
This also has a fairly simple answer. Buyers are not paying as much as they would for policies that are medically underwritten. Having said that, sellers will get less than if they were not healthy and sold them in a medically underwritten LS situation. We are talking about term policies that for many, will simply expire, which will leave the insured with nothing. The saying is that 4 percent to 7 percent of something is better than 0 percent of nothing.
1) Male, age 74, 15-year term with CNA and $2,000,000 face value that was issued in 2000. The policy was out-of-conversion period. The policy sold for $60,000, or 4 percent. The client used the 60,000 to help purchase a $500,000 UL that had a premium of 16,000. Agent compensation: Sale of the policy, $12,000 or 20 percent of offer. UL sale $14,400 or 90 percent of UL premium. Total Comp: $26,400
2) Male, age 71, purchased a 10-year term nine years ago for $1,000,000 face amount. The term policy was converted and the new premium was $52,000. The converted UL policy was sold for $72,000 or 7.2 percent. The client then purchased a new 10-year term policy with $500,000 of face value for $6,000 annual premium. Agent compensation: The conversion of the policy: $41,600 or 80 percent of the conversion premium. Sale of the policy: $14,400 or 20 percent of offer. Term sale: $4,800 or 80 percent of the 10-year premium. Total Comp: $50,800
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