A Fair Surrender
by Carolyn S. Ellis
Ms. Ellis is Features Editor for Advisor Magazine. Connect with her by e-mail: cellis@lifeheralth.comGWG Life, a subsidiary of GWG Holdings, is a leading life settlement provider and advocate for seniors to recoup fair market value for life insurance policies they would otherwise abandon. In recent years insurance carriers have raised premiums in response to prolonged low interest rates and to meet reserve requirements, intensifying the pressure on seniors to lapse or surrender non-essential life insurance policies.
We talked with Michael Freedman, president of GWG, about how advisors and their clients can access this source of much-needed retirement funds.
LH&A: You’re in the business of helping seniors derive funds for retirement through the secondary life insurance market. Tell us about this opportunity.
MF: GWG Life is in the business of life settlements, which are the sale of a life insurance policy by a senior policyholder who no longer wants, needs, or can afford the policy. (We’re a subsidiary of GWG Holdings, a specialty finance company.)
As an alternative to lapsing or surrendering the policy he or she sells the policy for a market value which is on average 4-10 times more than cash surrender value. GWG is a buyer of policies licensed throughout the U.S. by state insurance departments. We’ve been in business for ten years, and we’re one of the most active buyers in the market.
L&HA: Life settlements are not a new concept, so why such an emphasis now?
MF: The right to sell your policy is an inherent feature in all U.S. life insurance policies. The concept has matured in the last 20 years because our senior population is growing and universal life policies sold over the last 20-30 years are becoming unaffordable. Statistics show that almost nine out of ten universal life policies issued never pay a claim which means they’re lapsed or surrendered. People looking to get the market value for their assets are discovering the secondary market for life insurance.
L&HA: Is there a push right now to educate consumers and financial professionals about life settlements?
MF: The Baby Boom generation is turning 70, and older, and they’re going to be part of a large market-push for the next 20 years. The life settlement market has matured over the last decade with very strong consumer-focused laws enacted in most states. Now efforts are focused on direct-to-consumer outreach and on educating financial professionals such as insurance agents, financial advisors, estate planners, CPAs, estate attorneys, and elder care advisors.
L&HA: How do life settlements compare to the viatical-settlement concept of the 1990’s?
MF: A viatical settlement is the sale of a policy by an individual diagnosed as terminally or chronically ill, someone facing end-of-life decisions. A life settlement is a financial planning, estate planning, or personal planning tool to help individuals fund retirement or pay for long term care.
The National Association of Insurance Commissioners (NAIC) has reported only one consumer complaint involving life settlements over the last four years. This is a well-regulated, safe and secure transaction not only for seniors but also for financial advisors who are recommending what to do with an unaffordable or unneeded life insurance policy.
L&HA: Who’s an ideal candidate for a life settlement?
MF: I often use the phrase, “unwanted, unneeded and unaffordable.” Ideal candidates are seniors 65 and older who have been paying premiums on a life insurance policy for any number of years. But now when living on a fixed income, they find their kids are grown, there’s no longer a beneficiary, or estate tax laws have changed. It’s also possible the policy has become unaffordable because in the last few years insurance companies have been raising premiums on seniors particularly.
We have a long term care crisis where people who don’t have the resources to pay for long term care are defaulting onto Medicaid. If these individuals can sell their life insurance policies whether they’re going on Medicaid or not, this market value could help significantly to meet underfunded needs. For example, if someone has a $500,000 life insurance policy with depleted cash value that’s now $20,000 or even $10,000, and if that person is age 70 and has a health impairment, he or she might sell that policy for $100,000. That could be 4-10 times what they would otherwise get. This is a game changer.
L&HA: Does a life settlement require underwriting?
MF: Before GWG buys a policy we do both medical and financial underwriting. We look at the individual’s current health. Depending on the size of the policy we can do a medical interview along with a prescription database check, with the client’s permission. There’s no new data collection like blood work or EKGs. We also look at future premiums, type of policy, and policy features.
L&HA: What do you do with the policies you own?
MF: Secondary market companies use a variety of strategies. GWG Life is a “buy and hold” company. We hold the policies we buy, paying the premiums until maturity. GWG also uses those policies as collateral for our company which issues publically registered securities.
Conning Research has been studying the secondary market for 15 years and they estimate that seniors 65 and older represent a potential market of $182 billion a year of life policies that could be purchased in the secondary market. That compares to about $2 billion a year currently being purchased. This is a tremendous opportunity from a business standpoint, but lots of people don’t know about it.
L&HA: How are these life settlements regulated?
MF: Transactions are covered by state insurance laws in 42 of the 50 states representing more than 90 percent of the U.S. population. These laws feature high levels of consumer disclosure including alternatives to selling the policy and risks such as claims of creditors or reduction or loss of government benefits, cash surrender value or accelerated death benefit if available, and any compensation paid to settlement brokers. Settlement laws require that individuals selling their own life insurance policies obtain a competency certification from their attending physician. Life settlement buyers like GWG and life settlement brokers have to be licensed.
L&HA: Tell us about new legislation pending in Massachusetts.
MF: House Bill 822, the Medicaid Life Settlement Bill, has now passed the House of Representatives and is being considered by the Senate. It notifies seniors who are applying for Medicaid to pay for long term care that if they sold their life insurance policy for market value and used those funds to pay for long term care they would be eligible for Medicaid after they use up the life settlement proceeds.
L&HA: Is there any push back to life settlements from the insurance carriers?
MF: Life insurance companies have opposed this pro-consumer opportunity inherent in a life insurance policy for a long time. In April, Georgia passed an anti-retaliation statute that prohibits insurance companies from punishing insurance agents who assist their policyholders with a life settlement. Similar laws exist in New York and Virginia and legislation is being considered elsewhere. It shouldn’t have to come to that. We’re talking about less than one percent of the over $600 billion of life insurance that is lapsed or surrendered in the U.S. every year.
L&HA: Do agents and advisors need to be appointed with GWG?
MF: We appoint insurance agents, financial advisors, and other professionals to educate consumers about life settlements and recommend individuals to GWG. Our program is similar to the way insurance companies appoint agents. There are also life settlement brokers independent of the buyer who have a statutory, fiduciary duty to represent the policyholder. GWG pays a referral fee to our appointed agents, and life settlement brokers are paid a commission which is taken out of a gross offer from the proposed buyer to the seller.
L&HA: What would be your three top takeaways for agents and advisors?
MF: No. Number one, the sale of a life insurance policy as an alternative to lapse or surrender is a significantly valuable proposition. Number two, life settlement is a highly and well-regulated transaction that individuals and their advisors can feel comfortable with. And number three, advisors should view this market as a way to fulfill their duties and responsibilities as well as to grow their practice. ◊
