Many perceive the value of life insurance as the death benefit. However, over $200 billion in life insurance is lapsed or surrendered every year, returning nothing, or pennies on the dollar to the policyholder. Life settlements allow policyholders to sell policies they don’t want or can’t afford on the secondary market for prices that can be four to 11 times higher than the surrender value. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Lucas Siegel, Founder and CEO of Harbor Life Settlements, to discuss life settlements.
In this episode, you will learn:
- What a life settlement is, and how they work.
- The primary reasons policyholders consider selling their life insurance policies.
- The eligibility criteria for policyholders looking to sell their life insurance.
- The typical process of a life settlement.
- The future potential of the life settlement market.
- And more!
Resources:
harborlifebrokerage.com | [email protected] | Harbor Life Exchange | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by a special guest, Lucas Siegel, Founder and CEO of Harbor Life Settlements, a company that helps retirees facilitate life settlements. Lucas, welcome to the show.
Thank you so much for having me.
Life settlements offer a unique way to generate funds for individuals who hold life insurance policies. Whether you’re considering selling your policy or an investor intrigued by the potential returns, I’m hoping that today’s conversation with Lucas will help you understand the ins and outs of life settlements. For those unfamiliar with the concept, could you explain what a life settlement is and how it works?
What Are Life Settlements?
Just like a house, car, pension or 401(k), life insurance is private property, as of a 1911 Supreme Court ruling in Grigsby versus Russell. A life settlement is a liquidity option for that asset. So, just like you can sell your house or sell your car, you can sell your life insurance policy.
So let’s say you’re 80-years-old with a $1,000,000 life insurance policy. You have a couple of options:
- You can continue to pay your life insurance premium.
- You can surrender the life insurance policy back to the life insurance company.
- You can sell your life insurance policy – a life settlement.
Many times, a life settlement will be much more lucrative than surrendering it. So the 80-year-old with a million dollar policy might be able to sell it for $500,000 and never have to pay a premium again. The sale of that asset means that when they do pass away, the private equity fund, hedge fund, bank or institutional investor that purchased that policy would get the $1,000,000. But they would also be responsible for the continuation of payments for as long as the 80-year-old is alive.
Now, there’s no “give back” on this transaction, correct? Once the settlement is in place, the previous policyholder is completely off the hook?
Exactly, there is no gotcha clause with this sale, and you do have to sign the documents right when it happens.
But there is one situation to note – it’s called a retained death benefit – for those who only want to sell 50% of the life insurance policy. Things can get a little sticky with these, because you’re not just selling it and walking away from it.
I’d say 95% of all life settlement transactions are pretty cut and dry. One individual sells the future potential death benefit of their policy, and gets cash for it at the time of the settlement.
Are there standards with the settlement? For example, is the cash always delivered in a lump sum, or can you negotiate a payment schedule?
We negotiate for clients all the time, but it’s always a lump sum. The cleanest way to do the transaction is a one-time lump sum of cash.
What are the tax ramifications of life settlements?
Taxation of Life Settlements
Great question. Disclaimer: I’m not a tax professional and I’m not giving official tax. But I’ll give you a basic overview of how life settlements are taxed.
The amount that you pay into the policy throughout the life of the policy is called the cost basis. So let’s say the 80-year-old with a million dollar life insurance policy has paid $400,000 into it throughout the life of the policy.
In scenario one, let’s say they get a $350,000 life settlement offer. In this case, they will pay $0 in taxes, because the amount of the settlement is less than the cost basis.
In scenario two, let’s say they get a $500,000 life settlement offer. In this case, there is a differential of $100,000. That is going to be taxed as long-term capital gains.
Now, there are different situations where if your cash value is greater than the amount you’ve put in, there can be some ordinary income. But, I pretty much never see it.
How Much Is A Life Settlement Worth?
How are these policies valued?
So, there’s a ton of underwriting involved, which is why people engage with us at Harbor Life Settlements. We do all of the underwriting.
It can get very complicated, and there’s different permutations of a life settlement, but I’ll share the standard… We get the medical records of the insured. Then, we get a third party actuarial firm to do a life expectancy analysis. That analysis predicts how long the individual is going to live, but it’s always wrong. Our job, strangely enough, is to find the shortest life expectancy analysis we can. Because we are fiduciaries and we typically work with advisors, we want the insurance policyholder’s health to look as bad as possible. Why? Because that means the investor will pay more for the policy, which nets more for the families we work with.
The life expectancy analysis, done by a third party, is almost like an appraisal of a house. Then, we do the underwriting. Here, we correlate. If you look at how is the life settlement priced and the most basic views, you’ve got the death benefit on one side and then you’ve got how much is the premium per month, and then how many months is that hedge fund private equity fund investor going to have to pay until the person passes and they get that death benefit. Then they stick a net present value on it, looking at a discount rate.
What happens next? Is there a market for life settlements?
How Life Settlements Are Auctioned
Before us, not really. But in 2020, we launched the Harbor Life Exchange, which centralizes every major buyer in the industry into one online bidding platform. The results have been spectacular, with the exchange providing 50% higher sale prices than the industry average.
It’s basically equivalent to the MLS, which lists real estate, but for life settlements. We underwrite the policies – doing the work to figure out their value – and then they’re made available for bidding on an online, HIPAA compliant certified exchange. The exchange brings together almost every single institutional investor in the world that buys life settlements.
Creating this exchange has made these policies more competitive, because instead of getting bids from one or two people, the entire market fights for the policy, which drives the price.
Additionally, a lot of advisors are fiduciaries and need an auditable fiduciary track to show that what they did was the right thing for their client. Our auction gives not only bid history but bid history by the second, to show the auction price was the best price they could have gotten in the market.
In our auction, we built something called an anti-sniping clause. Because the auctions are timed, we found early on that investors were trying to bid in the last 30 seconds to get a better price. But with the anti-sniping clause, anyone new bid in the last 30 minutes of an auction automatically extends it an additional 30 minutes. It also notifies all the people who previously bid.
You mentioned that institutional buyers have access to the Harbor Life Exchange. Can individual investors access the platform too?
Not really. It’s mainly institutional. If an individual wants to purchase a life settlement, we typically send them to some of our institutional intermediaries. We’re dealing with highly sensitive information – this is people’s health – and so we don’t let any Joe Schmo on the platform. However, we will point them in the right direction. Our job is to represent the financial advisors and the insureds, not the investors.
Okay, that makes sense. So after the auction is complete, is the final step paperwork?
The Life Settlement Transaction Process
Once the auction ends, we build an offer letter that shows the full bid history – it’s an auditable trail – and that’s presented to the advisor and the family who then have a choice to make. If they accept the bid, we notify the fund, and we work with the buyer in contracting.
Our company preps all the contracts, sticking in notes to show the insured where to sign what, and then we FedEx it to them. They sign it, send it back and we review it to see if anything is missing. If not, we send it straight to the fund and their legal team will review it. At that point, the fund is in escrow, and we put into the life insurance company a change of beneficiary and ownership.
Once that’s been confirmed by the life insurance company, escrow is released and the previous owner of the life insurance policy is paid.
Seems pretty seamless. You mentioned how health factors into the price of the settlement, are there any other factors that affect the price of the payout?
Health is the biggest part of it, but loans on the policy are also a factor. Harbor Life Settlements has another program for loan refinancing – it’s probably 40% of our business right now because interest rates have gone up so much. So loans are part of it.
How to Know If You Qualify for a Life Settlement
Does the type of life insurance policy matter?
While universal life is the most common policy purchased, convertible term, variable life, and second to die policies can qualify for a life settlement as well. Although we do whole life deals, it’s harder from a traditional settlement perspective. But we have a lending program that works as a life settlement with whole life policies where people can get all their cash out and keep a residual death benefit, while never having to pay a premium again.
What is the ideal candidate for a life settlement?
If I’m going to give a truncated idea of who should seriously consider a life settlement, I’d say it’s someone:
- Over the age of 75,
- With a policy of $100,000+,
- Whose sick.
Now, for the loan program, it doesn’t matter what your age is.
How sick? I know terminal sickness falls under a viatical settlement…
When I say sick, I mean 15 years or less of life expectancy. Viatical settlements typically refer to two years or less of life expectancy. Those are worth a ton of money, because the investors only have to wait a couple of years to receive the death benefit.
Makes sense. You mentioned that Harbor Life Settlements created the marketplace for life settlements… How did you originally get into this space?
I worked on the fund side, for the big institutions purchasing life settlements. At the time, the market was so bifurcated, it was insane. You’d get calls from people just wheeling and dealing… There were a lot of backdoor deals going on in the industry. It felt a little wild west. Since I saw how chaotic it was on the purchasing side, I thought, ‘Why don’t we go fix this so that we can help more people?’ That’s what we did. We centralized the buyers into one individual place and made it auditable.
How have the regulations improved since that time, when the industry felt like the wild west? I would assume that there’s more protections for the seller now, but what about the buyer?
The regulations are shocking to me… Your initial reaction was that there must be more protections for the seller. Yes, there are. For example, it’s required that you have a provider in a transaction. Think of a provider like brokers in a real estate transaction – there’s one that represents the seller, and one that represents the buyer. Two realtors, right? Yet, the regulation passed says that the provider must represent the fund, and the buyer not. You have an entity protecting the insured. It seems reversed. It makes you think, ‘Who paid the lobbyists to pass that law? The funds?’
So it’s important to have us, or someone like us, involved – a licensed broker who is legally obligated to represent the person selling, not the person buying.
But other regulations have been passed. I would say that 90% of the shenanigans that were present in the eighties and nineties are gone. It’s become much more uniform.
What do you see as far as trends or what’s going to happen next in the industry?
The Future Potential of the Life Settlement Market
I think life insurance companies will get way more involved in the transactions, because it’s a way for them to buy market share from each other. For example, if Lincoln buys a bunch of New York Life policies, then Lincoln owns a piece of New York Life. It’s also a way for them to hedge their bet and make sure they’re getting some of the upside when someone passes away.
I also predict more capital will enter the space, and that life settlements will become a household name. Right now, when a financial advisor is doing an annual review of a client’s assets, many of them put the cash value of the life insurance policy in that review. Meanwhile, a life settlement is typically 4-12 times that cash value. So, all of those financial advisors are engaging in irregular reporting, since they’re not showing the true value of the asset. I hope that will change, because a lot of families are making financial decisions with incomplete information.
Technology will also disrupt the industry. The biggest unknown in this business – from an investor’s standpoint – is longevity. Is the life expectancy correct or incorrect? Any fund that has lost money in the space, lost it because of longevity. Well, with all the advancements in science and genetics – everything from advanced blood testing to electronic medical records and coding – life expectancies will become more accurate. I think we’re going to start seeing AI that can look at data points and triangulate a personalized mortality curve – providing a personalized life expectancy almost instantly.
We also have an aging population – the average number of people turning 82 per day is expected to double. All the while, medical and long-term care costs are growing at an insane rate. Many people are stuck with this asset – their life insurance policy – and have a need for liquidity so that they can care for themselves in the future. Because of that alone, I think this industry is going to grow tremendously.
Well, Lucas, we’re just about out of time. Thank you for joining me for an episode of The Agent of Wealth. It was so great speaking to you about how individuals can get the most out of their life insurance policies through life settlements. How best can the listeners get in contact with you?
Your listeners are welcome to email [email protected] to reach our team. We’re really excited to get to work and see how many people we can help. Thank you, Marc.
Great, we’ll link to that in the show notes. Thanks again, Lucas. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
Market Recap Week of 9/05/2023 Through 9/08/2023