I always seem to take a public beating when I bring up life settlements because I’m opposed to them and those who aren’t really take offense to those of us who are. But, to the question. Could increased sales of life settlement contracts lead eventually to higher prices for term life insurance?
I think it’s important to underscore some of the assumptions that have helped term life insurance rates keep going down for so many years. The simple explanation that mortality experience is improving helps explain the downward trend, but the historically low cost per thousand is based more on the product and how it is handled by the consumer.
When you look at someone who is paying $200 a year for $250,000 worth of 20 year term insurance, most folks understand there must be a factor that is driving the ability to offer insurance at that ridiculously low rate. The two top factors are the tendency for people to lapse their coverage before the end of the term, and the tendency for relatively few people to convert their term policy to permanent coverage. The reason these two factors drive down the cost of term life insurance is that both of them mean that the insurance company has collected premium and not paid a death benefit.
This keeps the cost of term insurance low. If everyone kept their term to the end of its’ guarantee and then converted it to permanent coverage and kept it in force until they died, companies would have to factor in paying death benefits on all policies, something that is not even remotely in the picture at this point.
So, life settlements! It used to be all about getting older, less healthy people to sell their term policies to third parties. As this practice has grown, I believe it has at least subtly changed the dynamic that has kept term insurance costs down. More policies are being converted by the new owners of a sold policy than was anticipated when the policy was originally priced.
The newer surge in life settlements targets younger, healthier clients who, having come to the end of a guarantee, sell their old policy and buy a new term policy. I believe that this newer market is the one that will eventually tip the scales and start driving term rates up.
Congress has blessed life insurance proceeds with a tax free status for a long time. Life settlements have many in government questioning why they should give tax free status to something that is sold as an investment. They have a valid and strong argument and personally I hope they take action to withdraw the tax advantage from policies that are sold as investments, life settlements.
Bottom line. None of this happens overnight, and I don’t expect that one person making a few bucks selling their term insurance policy is really going to care if that impacts the industry, but I care. It’s a good industry and it is taking off in directions that aren’t necessarily in the public’s best interest. The world according to Ed!