Deal flow in the life settlement industry’s secondary market can be separated into two main channels – the direct-to-consumer market, where insureds sell their policies to a licensed life settlement provider, perhaps because they have seen or heard TV or radio advertising – and the intermediated channel, where life insurance agents, accountants, attorneys and wealth managers work with their client to sell their policy via a licensed life settlement broker.
In the intermediated channel, deal flow from the wealth manager – registered investment adviser (RIAs) – cohort is on the rise. And the increased activity is coming from what is, figuratively, two sides of the same coin.
“A lot of the increased interest in the life settlement market by RIAs is actually being driven by the RIA client. They are seeing advertising on TV, articles online, and in turn, asking their wealth manager whether selling their life insurance policy is right for them,” said Jon B. Mendelsohn, CEO of life settlement broker Ashar Group.
“And the RIAs themselves are also seeing the same commercials and taking a more proactive approach with their clients. There is increased awareness coming from both segments that is driving increased activity in the secondary market.”
The contribution that the RIA segment makes to the life settlement industry in terms of secondary market deal flow is one of three hats they wear in the space.
The second is that of the capital allocator. Life settlement asset managers source their third-party capital from the usual suspects – pension plan sponsors, foundations, endowments, funds of funds, insurance companies, family offices, and high net worth individuals. RIAs are increasingly funnelling their clients’ assets towards life settlements, as part of a broader effort to engage with alternative investments such as hedge funds, private equity, private debt, real estate and venture capital more broadly.
Hats one and two are linked by something of a virtuous circle.
“In many cases, an RIA working with a client to sell a life insurance policy they no longer need is beneficial to them because it’s increasing their AUM. And life settlement brokers like us have the same fiduciary duty to the policy seller as the RIA does to their clients’ best interest, so the RIAs fiduciary duty is satisfied here. The premiums that the insured was previously paying, and the lump sum they receive from the sale of the policy, can now be routed into other investments, which increases the AUM of the RIA. Life settlements works well for both sides,” said Mendelsohn.
The third hat is, currently, by far the smallest the RIA wears. But it could be the most influential: that of increasing the number of life insurance policies that could turn into life settlements in future by incorporating life insurance into the financial planning process that they do for their clients.
Except that they don’t. Or, at least, not many of them do. Reasons abound as to why life insurance is an afterthought for a wealth manager/advisor. First, most RIAs are not licensed to be compensated for work involved in managing life insurance policy assets. Second, in some states, they aren’t licensed to even talk with clients about their life insurance, let alone sell it. Third, even for those RIAs legally able to talk with clients about life insurance, they lack an eco-system of tools, educational resources, and service providers to support the prudent selection or retention and proper management of life insurance in clients’ ‘Best Interests’. Without such an eco-system, like they have for investment management, no wonder RIAs feel unprepared and hesitant to incorporate life insurance portfolio management in the financial planning process that they do for their clients.
All this adds up to what is a substantial roadblock to getting RIAs more involved in life insurance at the ground level.
“There’s no reason why an RIA can’t include life insurance portfolio management as part of their overall service offerings,” said Barry Flagg, CEO at life insurance analytics firm, Veralytic. “But advising clients without tools and service providers that support their fiduciary business model is more time-consuming and outside their comfort zone – and human beings rarely volunteer to do things that are both more difficult and outside their comfort zone. In the meantime, the more progressive RIAs are engaging “subadvisors” to evaluate and manage clients’ life insurance policy assets, in the same way they already do for other specialty financial instruments.”
The life settlement industry believes that its market could be significantly larger. Industry group the European Life Settlement Association, publisher of Life Risk News, recently published a fact sheet that suggests the secondary market could potentially be three times its current size. That belief is driven largely by the gap that exists between the number of policies transacted annually in the secondary market, and the lapse rate of life insurance policies in the US. In 2021, the combined termination rate of all life insurance in the US was worth more than $600bn, whereas the total dollar value of transactions in the secondary market was only $4bn. Whilst not all of the $600bn would qualify for a life settlement, the disparity is clear to see.
But what’s also true is that RIAs could be seed planters, growing the total number and value of life insurance policies that could eventually qualify for a life settlement, if they were to engage with life insurance to a greater extent. Combining that, with their role as an existing driver of secondary market supply, and their influence as capital allocators, shows just how important this cohort is to the life settlement market going forward – and why breaking down barriers to life insurance education is key to success in the long term.
“The two roles that RIAs currently play in the life settlement industry are enough by themselves to justify making the wealth manager channel a strategic priority for the life settlement industry,” said Flagg. “But what also needs to happen is for some of the barriers that currently exist for RIAs to engage with life insurance at the outset to be lowered or removed. That’s a longer–term play but one that makes sense for the life settlement industry to look into.”