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The U.S. life settlement market appears to have found its stride. After a rocky period in the aftermath of the Great Recession, the number of transactions in the life settlements marketplace seems to have stabilized and embarked on a steady growth trajectory in the last five years, according to Conning’s 2021 life settlements report.
“The volume of new settlements continues to increase, a positive indicator for growth in the number of in-force life settlements,” said Scott Hawkins, a director of insurance research at Conning. “Geographic expansion, capital raises and the sales of policy portfolios are recurring themes among market participants.”
These growth projections are based on more than intuition and wishful thinking. There are at least three major market forces that are driving the growth of life settlement transactions in the U.S.
Force #1: Demographic Trends
The U.S. population is aging. The number of Americans age 65 and older is projected to surge to more than 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24 percent from 15 percent, according to a report from the Population Reference Bureau. This surge in the number of seniors creates a larger addressable market for the life settlement industry.
Meanwhile, the retirement funding shortfall in America continues to worsen. Research from the National Institute on Retirement Security found that “the retirement savings levels of working age Americans remain deeply inadequate despite economic recovery.” Their analysis found that overall, four out of five working Americans have less than one year’s income saved in retirement accounts. Retirees are in need of sources of liquidity.
A slowly growing number of seniors and their trusted financial advisors are learning that one unexpected source they may be able to tap to access cash is a life insurance policy. Life insurance is a common asset in the U.S., with roughly six in 10 people in America covered by some sort of life insurance right now, according to LIMRA’s Insurance Barometer Study. Awareness is growing that life insurance is personal property and can be sold by the owner, just like any other asset in a senior’s portfolio.
Force #2: Regulatory Environment
The life settlement marketplace is now safe and well-regulated. With LISA leading the way, 42 states and the territory of Puerto Rico regulate life settlements, affording approximately 90 percent of the U.S. population protection under comprehensive life settlement laws. These laws establish a statutorily mandated waiting period before one can sell their life insurance policy from the time of issue, ranging from two to five years, and most have provisions where one can sell their policy before the waiting period if they meet certain criteria (e.g., terminal illness).
Ethical requirements have been adopted by the licensed professionals involved in executing life settlement transactions. Life settlement brokers are obligated to serve as fiduciaries serving the best interests of the consumer and life settlement providers are subject to ethical standards of professional conduct established by individual state licensing boards. Moreover, LISA maintains a code of ethics, which it describes as “fundamental to the values of LISA and essential to achieving its mission to lead the life settlement industry by setting high standards of integrity and professional excellence.” All LISA members must abide by this code of ethics or face expulsion.
Another tailwind with respect to the regulatory environment is the more favorable tax treatment of life settlements as a result of the 2017 tax reform law, based on IRS Revenue Ruling 2020-05. First, the law makes the tax treatment of a life settlement to the seller more favorable by providing that policyholders who sell their policy in a life settlement transaction are not required to reduce their tax basis by the cumulative cost of insurance charges (i.e., the same as a policyholder who surrenders their policy to the insurance company). Second, the law significantly increased the estate tax exemption, which could make some policies that were purchased for estate tax purposes no longer necessary and candidates for a life settlement.
Force #3: Transactional Workflow
The customer experience with a life settlement transaction is now easier and much faster than in previous years. The application process is now more streamlined and far more efficient, which means that most consumers can obtain a settlement quote with less paperwork and in a much quicker turnaround.
Price discovery is also vastly improved in today’s life settlement marketplace. Industry participants employ more accurate life expectancy modeling and are operating in a more competitive market for policies, so they generate bids much faster. This is good news for consumers and life settlement buyers alike because it means they can proceed with the sale in a more direct manner.
Finally, as with virtually every niche in the financial services world, the life settlement transactional workflow has been expedited by the assistance of emerging technologies. New software tools make it easier to process life settlement applications, conduct the due diligence and underwriting research to determine a bid, execute the documents required to complete a transaction, and facilitate the cash payment in exchange for the policy beneficiary reassignment.
Life settlements are now accepted as a viable alternative for seniors to the lapse or surrender of a life insurance policy. Demographic trends point to greater market demand in the years ahead, the industry is clearly safe, ethical and well-regulated, and transactions are now much easier and faster for consumers to complete. These market forces should support steady growth in the U.S. life settlement market for the coming decade.