Possible Effects of Covid-19 on the Life Settlement Market

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By Shane McGonnell

There are different schools of thought on how the coronavirus is affecting – and could affect – the life insurance market.

Over the past five years, the life insurance market as an industry has grown dramatically both in funds to purchase policies and in consumer awareness. In fact, a 2019 report from The Deal showed a 28% increase in policies sold in 2018 over 2017, while the face amount of life insurance policies sold increased by around $ 1 billion. to reach an impressive $ 3.8 billion.

And at the end of 2019, Conning announced that the life settlements market would experience a double-digit CAGR over the next decade. But that was all before the corona virus pandemic.

For consumers who are considering selling their policies, one school of thought is, “Maybe I shouldn’t be selling my policy or my parents’ policy now.” What if they contract Covid-19 and, God forbid, die? The death benefit would be greater than what I would receive by selling the policy.

It’s an understandable thought process. However, another valid concern that finance professionals are well aware of is: “What if the financial crisis caused by Covid-19 negatively affected the funding of life insurance settlements, exactly as it did afterwards?” the 2008 financial crisis? ”

Rules of life and economic blues

Let’s go back. In 1911, the United States Supreme Court ruled that life insurance policies are an asset and can be sold like any other asset that an individual may own, and over the years regulations have been put in place. place to strengthen consumer protection.

Prior to 2008, the life insurance industry looked a lot like it is today: a low internal rate of return from institutional buyers to high bids for sellers. But, when the mortgage crisis hit in 2008, and financial markets collapsed, much of the funding for life insurance settlements either disappeared or was diverted to other opportunities created by the crash.

Looking back 12 years, we can understand what could happen to settlement-life offerings during an economic downturn. Some policyholders and financial advisers fear that history will repeat itself and they have a right to be afraid.

If history repeats itself, life insurance companies will have less capital to buy life insurance policies from people interested in selling.

This would reverse the current state of supply and demand in the sense that there would be more policies to sell than funds available to buy them. This, in turn, would lower the amount of bids as we did in 2009, 2010, 2011 and 2012.

To sell or not to sell

For those on the fence, the time to sell may be sooner rather than later, as life insurance settlement companies are, at least for now, still afloat to buy policies.

In the near future, as the fallout from Covid-19 will continue to affect financial markets, this may not be the case. In fact, what we are hearing from our financial partners is that there could very well be opportunities for high yield bailout bonds, as well as a bullish stock market on the other side of this crisis and that large amounts of capital could move towards these and other opportunities.

In fact, Treasury Secretary Steven Mnuchin recently said that the current pandemic presents “a great investment opportunity”, referring to historic lows in global stock markets.

If this happens, the supply and demand for life settlement cases could change, which could increase IRRs for the investment side of life settlement and reduce life settlement offers to policy sellers.

Policyholders must weigh the unlikely chances that an insured will contract the virus against something similar to the end result of the 2008 financial crisis recurring in the life settlements market, which could affect the future ability of an insured to contract the virus. a policy holder to sell a life insurance policy.

Currently, life-settlement offers are still very strong and given the Covid-19 issue, policyholders may be in need of cash due to recent income or retirement losses and for medical care.

While there is no crystal ball to accurately predict what will happen, it is important for sellers to understand what could happen in the near future and what has happened before for the settlement market. -life and why.

As always, it is the job of the financial advisor to educate and provide options so that clients can make an informed decision.

Shane McGonnell is Executive Vice President of Abacus Life, a senior member of First Financial Resources for over 15 years, over 200 offices nationwide. Executive Vice President of National Insurance Brokerage, a national general financial services agency, and former Vice President of Advanced Settlements, A National Life Settlement Wholesaler. McGonnell started in the financial industry in 1997. With over 22 years of experience, McGonnell has a strong focus on life insurance advice and estate planning.

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