Over the years, the life settlement industry has had its ups and downs. During its heyday in 2007 and 2008, consumers sold $12 billion in life insurance death benefits to investors in the secondary market. But the economic downturn dried up investor money, and as late as 2015, just $1.7 billion in death benefits changed hands. (1)

For many years, life insurance provided just two benefits to a policyholder: a death benefit paid at the death of the insured, and cash value, which could only be accessed through a loan, a withdrawal, or a policy surrender. Today, an unwanted policy can fetch an amount much higher than its cash value, providing another alternative to a policy lapse or a surrender for policy owners, including TOLI trustees. The consumer is beginning to understand this viable alternative exists, with “organic growth” of the industry being driven by “the education of consumers and their professional advisors,” according to one industry leader, who also points out the “demographic trends” are tilted toward increased sales with “10,000 Americans turning 65 every day and struggling to fund their retirement income needs.” (2)

For investors in this asset class, 2018 was a good year, as life settlements outperformed traditional investments, like stocks and bonds, as well as most alternative investments.

Tax laws have grown more favorable for consumers selling their policies. The Tax Cuts and Jobs Act made consumer tax reporting simpler and lowered the tax consequences of life settlements to the seller. Just a few months ago, we reported on pending legislation that would make the sale of a life insurance policy a tax-free transaction for the seller if the proceeds were used to fund future long-term care needs of the insured and/or spouse.

The life settlement industry was once considered the “wild west” of financial transactions, but that has changed, and today, it is one of the most regulated financial markets. Consumers are becoming much more aware of the options with a life insurance policy, and if they are not aware, their beneficiaries are, which is why more than ever, TOLI trustees must educate themselves to the opportunities available for their clients. Failing to maximize the value of a policy by looking to the life settlement option before a policy lapses or is surrendered will be a future area of litigation for disgruntled beneficiaries, and the TOLI trustee who does not have a life settlement review as part of the trust file for any lapsing or surrendered policy will be fair game.

The TOLI Handbook, the industry guide published by ITM TwentyFirst and available as a free download at www.TOLIHandbook.com, has an entire chapter dedicated to life settlements. If you are a TOLI trustee, it might be time to get educated.

 

  1. Information supplied by The Life Settlement Association (LISA) and reported in The TOLI Handbook
  2. Speakers at 9th Annual Life Settlement Institutional Investor Conference Point to Significant “Organic Growth” of U.S. Life Settlement Market, Business Wire, January 28, 2019