Life Settlement Providers Score Win in Florida
The life settlement industry secured a big win this week with the enactment of a Florida law that may result in more life insurance policies being sold on the secondary market. The move follows similar legislation adopted in other states that could pose a challenge for life insurers endeavoring to more competitively price products and boost flat industry sales.
The new law, signed by Florida Governor Rick Scott, mandates that life insurers notify policyholders who are "considering makes changes in the status" of their policy (such as surrendering a contract for its cash value) that they should consult an agent or advisor about alternative options, including life settlements. The written disclosure notices must also stipulate that policyholders may contact Florida's Department of Financial Services for "more information" about alternatives.
“We would have liked the Florida law to be more stringent, but we got the best we could under the circumstances,” says Darwin Bayston, president and CEO of the Life Insurance Settlement Association (LISA), which represents life settlement providers. “The [finalized bill] boiled down to a negotiated compromise with the life insurance industry. Going forward, we'll be looking to strengthen [such disclosures] whenever and however we can.”
The law is an outgrowth of a 2016 Florida bill backed by insurers that would have required seniors to hold their policies for five years before then selling them on the secondary market. The aim: to prevent the sale of stranger-originated life insurance or STOLI policies by a third-party institutional investor who doesn’t have an insurable interest in the insured senior.
LISA members favored a two-year holding period. The final legislation that passed (HB 1077, to which the disclosure requirements were attached as amendments) provides for this two-year timeframe, but maintains a five-year period if a policy is subject to a loan secured directly or indirectly by an interest in the policy.
The Florida law is not as stringent as a Life Insurance Consumer Disclosure Model Act adopted in November 2010, then readopted in 2014, by the National Conference of Insurance Legislators. The NCOIL model law has greater disclosure requirements respecting policies that seniors are considering surrendering.
To date, six other state legislatures have adopted disclosure laws similar to Florida’s, including Kentucky, Maine, Oregon, Washington, Wisconsin (states that mandate disclosure of the life settlement option by statute or regulation); and New Hampshire, which mandates disclosure of alternatives (non-specific) to lapse or surrender.
A seventh state, Rhode Island, may adopt before end of week legislation that more closely mirrors the NCOIL Model Act, according Bayston.
In addition to a life settlement, other options may be suitable for seniors who no longer need or can no longer afford a permanent life insurance policy. These include a paid-up permanent policy carrying a smaller death benefit; extended term insurance offering the same face amount as the original policy, the coverage lasting for as long a period as the cash value will purchase; and maintaining the policy using automatic premium loans against the cash value.
Policyholders can additionally assign the policy to a non-profit as a charitable contribution. In cases where the insured is terminally ill or suffering from severe cognitive impairment, a policyholder can also accelerate the death benefit to cover medical expenses or convert the policy to a long-term care health insurance policy.
Generally involving permanent policies, life settlements pay less than the contract death benefit, but more than the policy’s cash surrender value. Policies eligible for the transactions typically carry face amounts exceeding $250,000.
The market’s growth poses a challenge to life insurers. As more seniors sell their policies on the secondary market, life insurers may have to revise downward forecasted lapse rates. That may force an increase in policy pricing, making products less competitive.
The life settlement market is poised for growth. The oldest of 78 million boomers turned 71 this year. And many of them will be looking to secure cash for their policies to cover retirement expenses or to establish a legacy for heirs.
LISA estimates that (as of 2015) insureds 65 years or older held $2.86 trillion of in-force face amounts. LISA pegs the face value of insurance policies these seniors lapse annually at $143 billion. In Florida, the 2015 annual totals were 211.7 billion and $10.6 billion, respectively.
Transacted life settlements in 2015 represent but a small fraction of in-force policies: about $1.65 billion in aggregate face amount, according to a June 2016 report from The Deal. The top five life settlement buyers, the report notes, include Coventry First, Magna Life Settlements, GWG Life, Life Equity and Abacus Life Settlements. The market’s top 15 life settlement companies concluded 1,643 transactions in 2016.
Bayston says the Florida law dovetails with the Department of Labor Fiduciary Rule, the first phase of which kicked in on June 9. He expects more producers will engage senior clients in discussions about life settlements (if not actually broker sales of their contracts) to align with the rule’s best interest standard.
Bayston also doesn’t foresee conflicts with life insurers, many of which prevented such discussions in prior years. He notes that, in a recent life insurance companies survey, most life insurers indicate that they now permit conversations about life settlements in planning engagements.
“There is definitely a trend toward requiring advisors to make consumers aware of what they might be able to do before they lapse their policy,” says Bayston. “In my own research, I’m seeing significant opportunities for seniors to take advantage of a life settlement. A lot of them allow their policies to lapse simply because they’re not aware of the option.”