I recently fielded two interesting phone calls.  The first, from one of my producers, was about the possibility of a life settlement on a life contract owned by a gentleman who had attended one of his seminars roughly five years ago.  The seminar had nothing to do with settlements, and the real reason he contacted my producer was that he did not know where else to turn.

It seems that the agent on the policy was not returning his phone calls about what to do with the $4mil policy with an annual premium of over $225K!  Why?  The client could no longer afford the premiums, and was considering surrendering or selling the contract as a life settlement.  The original producer probably knew that there would be no market for the policy, and he was right.  The irony is that the client in question, a healthy male, is 80 years old!  At first glance, this case looks like it may have some potential value as a settlement.  The truth, however, is that the expected returns that policy buyers now demand and the general increase in life expectancies has rendered this policy and many others worthless in the secondary market.

The unfortunate truth is that this client now has a tough decision to make - come up with the money to pay the premium, or let the policy lapse without value to stop the bleeding.  As of this writing, I believe that this policy has or is about to lapse, and the client is out hundreds of thousands of dollars.  

The second call I received, however, shows that you can sometimes be in the right place at the right time, and that a relationship with an expert in the settlement industry is probably great idea.  This time the call was from my expert, a firm that I have recommended as a resource for this type of transaction to many of my producers.  Turns out they had a party interested in a contract that we had evaluated earlier in the year.  

Why was this party interested?  They were closing out a portfolio of policies and for some reason found themselves in need of a couple policies to wrap things up at the last minute.  If we were able to move quickly, we may have been able to obtain an offer and deliver a nice exit strategy from a policy that was no longer needed by the owner.  Unfortunately for all of us, the policy had already lapsed, rendering us unable to take advantage of this fortunate turn of events.  This client had also paid thousands in premium (not as much as the first policy owner thankfully!) and ended up with nothing to show for it at the end of the day.

The moral of the story from my perspective is two-fold.  The first is that there is still a long way to go to return to the land of milk and honey in the settlement space from pre-2008.  Although there is more money available now, there are so many policies available that the buyer truly has the advantage and can be very selective.  Frankly, we will almost certainly not see a return to the peak simply based on the adjustment of life expectancies that has eliminated much of the arbitrage in transactions that do not involve a significant change in health since policy issue.   

The second is that keeping tabs on this space is really critical for any advisor.  Even if you personally do not or can not work on this type of business, being aware of the factors that impact policy value in the secondary market can help you identify opportunities for policy holders that may otherwise pass them by.  Believe me, when I received the call about the potential buyer on the first, smaller policy, my second thought was, hey, what about that larger one?  This time around it did not work out, as the large face amount did not fit the parameters the buyer was looking for.  Next time we may just have a client with a policy that does fit and the happy ending for the owner that would result.