At the end of May, Abacus Life Settlements, an Orlando, Fla.-based licensed life-settlement buyer, reported nearly 20% growth in its transactions completed last year, representing a nearly $40 million increase in the total face value purchased. That represents a big uptick in an often overlooked, misunderstood industry.

New opportunities in Life Settlements

At the end of May, Abacus Life Settlements, an Orlando, Fla.-based licensed life-settlement buyer, reported nearly 20% growth in its transactions completed last year, representing a nearly $40 million increase in the total face value purchased. That represents a big uptick in an often overlooked, misunderstood industry.

But was this jump just a fluke, or is it indicative of growing interest in this little-known option? Is there indeed a surge in life settlements overall? And if so, why?

In a press release, Abacus attributed much of its progress to a national advertising campaign. Scott Kirby, a managing partner there, said, "A majority of consumers are unaware that selling their life insurance is even an option; it is a vast and untapped market."

That's undeniable. James W. Maxson, a partner at Culhane Meadows in Atlanta and chairman of the Life Insurance Settlement Association (LISA), concurs. "Yes, the industry seems to have returned to a level of increasing organic growth based on the various awareness initiatives being undertaken by both LISA and its members."

In addition to the industry's awareness-raising initiatives, including TV ads, Maxson attributes this growth to broad socioeconomic factors. "We are at an inflection point as a country," he says. "Approximately 10,000 boomers are turning 65 every day. Some have been thrifty and saved well for retirement, [but] others might have been hit hard by the Great Recession and aren’t in the financial situation they’d hoped to be in. Many of these folks are looking for another way to create liquidity, and life settlements are a great way to do it."

For those who don't know, the term "life settlement" refers to a transaction in which someone who has outgrown the need or desire for a life insurance policy sells the policy to a third party—usually an institution—for cash. The cash amount often exceeds the policy's actual surrender value. The purchaser then takes over premium payments and becomes the beneficiary of the policy.

Life settlements aren't new, but they've had an uneven reputation. "Contrary to what many folks think, this industry isn’t the Wild West," contends Maxson. "Forty-two of the 50 states regulate life settlements transactions, and another three regulate other aspects of the sale of life insurance policies. Purchasers of policies must be licensed by the departments of insurance in which the policy owner lives, and the contract forms are filed with and approved by those same insurance departments. So, in actuality, these are regulated transactions with a number of protections built in for consumers."

Despite the recent surge, advisors and clients remain uninformed. "Many advisors and clients are clueless with respect to this option," says Steven J. Schacter, an attorney at Forest Hills Financial Group in Chappaqua, N.Y.

He points to an 84-year-old client with a $2 million life policy, the current premiums for which amount to $100,000 a year. That's an expense the client can no longer justify. For someone like that, a life settlement may make perfect sense. "People are living longer, and many of the life insurance policies they purchased years ago do not have the appropriate guarantees that are required to maintain the policy until death," says Schacter. The policyholder, he says, often ends up having to "pay lots more than originally planned!"

To better serve their clients, advisors ought to come up to speed. "There is an issue of potential liability," cautions Maxson. "Some policy owners have brought actions against their financial advisors who failed to advise them of the life settlement option, with the result that the policy owner lapsed or surrendered a policy that would have had substantial value in the secondary market for life insurance."

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