Senior Settlements -- Market

In the late 1990s, a new settlement service (similar, in some aspects, to viatical settlements) made an appearance. These new settlements, referred to as “senior settlements” or “high net worth transactions“, make life insurance policies more liquid by offering relatively healthy, older policyowners the opportunity to sell their policies during their lifetime for some amount less than the policy face amount but more—sometimes significantly more—than its cash value.

Although these senior settlements are designed to appeal to relatively healthy policyowners, it is important that the term healthy, when used with senior settlements, be understood in its proper context. While viatical settlements are meant for insureds of any age with serious, life-threatening illnesses, senior settlements are designed for older insureds who may have chronic and sometimes serious illnesses that are not immediately life threatening. So, although we may consider the senior settlement market as one composed of healthy insureds, they are healthy only when compared with those insureds who make up the viatical settlements market.  

According to a recent study, the “senior settlements” is the fastest-growing sector of the secondary market for life policies. This result is not surprising since Americans, age 65 and older, are the most affluent and fastest-growing segment of the population. Furthermore, policyowners in this demographic segment own life insurance amounting to approximately $500 billion—an enormous potential market.  These trends will only continue as the baby-boom generation ages.  The number of people 65 and older is expected to increase more than 20% from the years 2000 to 2010, according to the U.S. Census Bureau. Estimates are that there will be 70 million people 65 and over by 2030, representing about 20% of the U.S. population. Over the next 10 years, individuals reaching age 65 will bring with them a comparatively greater amount of life insurance coverage than the generation before them.  Industry experts estimate that life settlement sales could reach $20 billion to $50 billion per year within the next 10 years.  Proceeds from a life settlement can be used to reinvest in additional financial planning tools, such as long-term care insurance or annuities. The sale of more appropriate insurance products, made possible by the sale of a life insurance policy, will also enable insurance professionals to receive additional commissions, thus generating added revenue into the economy.

The senior settlements market is made up of generally affluent individuals age 70 or older, whose original reasons for purchasing their insurance no longer apply. Often, the premiums paid for this now-unneeded coverage have become uneconomical.

In general, senior settlements apply to policies of at least $250,000, held by insureds who have suffered some decline in health since the policy‘s issue, such as heart disease, adult-onset diabetes or high blood pressure. The condition need not be life threatening, but it is usually life shortening. In the termonology of the industry -- prospects for senior settlements have “impaired” health.

In the not-too-distant past, the principal concern of many older individuals was not living long enough. With the life-extending but expensive drugs and technology now available, the principal concern today is outliving one’s financial means.  

It is expected that baby boomers, long accustomed to high-income lifestyles, will rely on the new liquidity of their life insurance afforded by senior settlements to provide augmented flexibility in their retirement planning. For individuals in their 70s or 80s who are running low on cash, selling a life insurance policy may be the key to a few more years of high-quality living—not fundamentally unlike the promise of a reverse mortgage.

It is not just individual policyowners who make up the market for senior settlements. A large segment of the market lies in business-related life insurance.

A key person, heavily insured by his or her employer, may leave that employer to join a different company, possibly making the existing life insurance no longer necessary. Or, a large life insurance policy that was used to provide funds for a buy-sell agreement may no longer be needed when the individual’s business interest has been bought out by the other partners.

Whether the policyowner seeking a senior settlement is an individual with grown children and a deceased spouse or a corporation with a no-longer-needed life insurance policy, the total market is large. It has been estimated that 20 to 25 percent of life insurance policies owned by these older, affluent policyowners are worth more—sometimes much more—than their cash value.

If there is an obstacle in the development of the senior settlements market, it lies in the absence of a central referral source. Unlike the market for viatical settlements, which is served by a network of physicians and organizations, the newer market for senior settlements is fragmented and unorganized. As a result, the life settlements market is not nearly as easy to reach as the viatical market.