Vol 9 No 5		June 2007

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Secondary Market Gone Awry

"The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning - but appears to have evolved too often into transactions where the main purpose is to procure obscenely high fees and commissions."

• The original life settlement business plan was to buy unwanted or unneeded policies from insureds over 65 whose health had deteriorated more than just the passage of time. This provided mortality arbitrage needed to make the purchase price higher than a policy's surrender value.

• Coventry First has been the major player. It is my understanding that they buy policies for institutional investors and that there is no chance an individual investor can learn who insureds are. It is critical that no investor knows the name of insureds and other policy details.
  
  
• Coventry's claim to buy only for institutional investors means offers should be in line with the life settlement market's current expected yields. Coventry's offers are probably most accurate and likely lower. Accepting lower purchase amounts may offer policy sellers comfort knowing of Coventry's claim that individual investors will not know who they are.
  
  
• It is likely that some 95% of potential policy sellers should retain them. There are only two situations where selling a policy is the best choice. One is an insured that wants cash. The other situation is a policy with heavy surrender charges and poor pricing. A $10,000,000 policy we are dealing with right now has poor pricing with combined premiums paid of $450,000 but only $50,000 of surrender value. It is in the client's best interest to replace it with a legitimately better priced policy. We believe a legitimate life settlement offer will be around $250,000 and this will make up for some of the surrender charge loss with the client ending up with a much better policy.
  
  
• Almost all other possible life settlement situations should result in the policyowner retaining the policy - at least until the policy will terminate. I was asked to comment and run some calculations for a BusinessWeek story in the October 31, 2005 issue. Don wanted to stop paying premiums on his $1,000,000 UL policy with $100,000 cash values. Now 72 with health problems he didn't have when the policy was purchased at 60, Don can sell the policy for $275,000. But he doesn't need the cash - just wants to stop paying premiums - so the best move is to keep the policy for another five years using the $100,000 cash values to pay the cost-of-insurance. After five years the policy will be worth around $475,000 in the life settlement market (Don's life expectancy is getting shorter) and there is about a 35% probability Don will die in the next five years. Keeping the policy for five years allows his beneficiaries to receive $1,000,000 tax-free if he dies and Don will very likely improve his situation if he waits and sells in five years.
  
  
• The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. This is a false picture. Almost always it is the agent soliciting policy owners to sell their policies because of the very high commissions they are paid. In the situation described above, the agent recommending the sale for $275,000 would be paid around $55,000. Meaning the life settlement firm would have paid out $330,000 for the policy but Don would not have known about the $55,000 going to the agent. Katt & Company handles life settlement negotiations for our normal hourly fees. A case like Don's would usually incur fees of around $5,000, saving him $50,000.
  
  
• The appetite for doing life settlement transactions has become so great (due to the grossly high fees and commissions) that the industry no longer is satisfied having only conventionally purchased life insurance policies as possible purchase targets. Instead, big-shooters solicit wealthy seniors to rent their high net worths and lives to become insured for the sole purpose of then selling the life insurance policies. These transactions involve a third party paying the premiums and paying the wealthy senior a bonus for renting his life. As my May 2006 AAII Journal column, Why You Should Avoid Investor-Initiated Life Insurance, shows there is little rational math involved in these representations and I am convinced that the end investor will lose a lot of money. I believe the main trick being used is to represent a shorter life expectancy than is in fact the case, and this substantially increases the expected yield and will attract individual and small institutional investors, including I believe newer hedge funds. Regulators and ethical life insurance companies are doing battle with the developers of this horrid practice of investor-initiated-life-insurance. INVESTORS - DO NOT BUY LIFE INSURANCE POLICIES UNLESS YOU RETAIN ASTUTE PROFESSIONALS THAT ARE COMPLETELY INDEPENDENT TO REVIEW EACH SITUATION. IF YOU DON'T YOU ARE LIKELY TO LOSE YOUR ARSE!
  
  
• I have had three experiences of individual investors being sent complete information about the insured, insurance company and policy they have invested in or bought. In each situation the settlement company that sold this investment denies they ever give out the names of insureds. They have lied to me. If sellers of life insurance policies knew their policy could end up in Tony Soprano's IRA they would be more cautious who they sell to.
  
  
• The most egregious situation I have seen is an agent that caused $30,000,000 of life insurance to be placed without the client's knowledge by paying the premiums himself and owning the policies. (See my November 2005 Life Insurance Perspective, The Intersection of Premium Financing and Life Settlements). This came to light when he tried to get the insured to agree to turn over medical records so the agent could begin selling policies. Now there is cross litigation going on.
  
  
• An estate planning attorney called me to inform me he had invested $50,000 in a life settlement policy (one of the situations that disclosed the insured's name) based on the representation that the settlement company had a 15 year track record of providing investors with average 16% yields. Nonsense, life settlements haven't been around 15 years and the yields are no where near 16%. This attorney was planning on recommending this to his clients. (See my January 2006 Life Insurance Perspectives, Investing in Life Settlement Policies).
  
  
• I hope regulators have the wisdom and courage to put the life settlement genie back in its bottle and return us to where it began. A nice secondary market for the very few situations that it makes sense to sell a life insurance policy.