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!
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
I’m not sure if term rates will go up but the permanent conversion policies and permanent life policies in general could become more expensive. This probably won’t happen because it seems as if more and more states are continuing to pass legislation to curb these life settlements. I read several articles this week about California and Florida either passing or proposing legislation to stop them.
Well! On the one hand there is Sonny who seems to believe that life settlements are a boon to insurance companies and Michael points out that state by state the life settlement market is being shut down.
I can tell you that some insurance companies have very strong feelings about the life settlement market, to the point that I lost an appointment with a company until they discovered that they had mistakenly linked me to a website that promoted life settlements. Once they determined that I was not linked to the site, the reinstated my appointment.
Just my opinion. I believe Sonny is neck deep in a sick little business.
What’s sick is that an Industry has banked on the fact that most policies will lapse… very good for them, no so good for the consumer. If my sister had not been informed by her financial advisor (not her insurance agent) that she could either settle with her Ins. Co. or sell her policy to an investor, she would have been left with nothing after years of paying premiums. Sick little business.
I agree that policies lapsing are not good for the consumer, but it is the consumer that lets them lapse. They get lapse notices. They get reinstatement notices. The fact that pricing reflects that clients aren’t real wild about paying insurance premiums and eventually just use that money for something else hardly makes life insurance a sick little business.
The fact that the life settlement option is available so they can sell their policies to a third party, with no insurable interest other than profit would be, in my book, a sick little business.
Just one last thought. What’s wrong with paying for protection and never having to use it? Anyone out there offering to buy your car or homeowner’s policy? Medical policy? The only reason the life settlement business is even in the cards is because they know there will eventually, absolutely be a claim and a profit. Not sure about you, but the idea of a stranger owning a policy on me that will only profit them if I’m dead isn’t falling into the warm fuzzy category for me.
Hello. It seems that insurance rates are dropping as people are living longer and since the inception of the life settlement market, premium volumes have gone up dramatically giving insurers more money to invest in the real estate market and stock market. Although insurers are not thrilled to pay death benefits, they are benefiting as well by receiving loans today in the form of premiums at low capital rates.
Sonny Artusa