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Guerrilla Marketing For Insurance Agents by Al Lautenslager, Certified Guerrilla Marketing Coach.
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Life Settlements -the next sub-prime headline? (originally Published January 2008- it is amazingly precient) Where's a yuppie to turn? If their home "ATM" machine is broken, their portfolio in shambles, where can they turn to raise cash in times of trouble? I'll accept that yuppie is a misnomer for the baby boomers these days since they are nearing retirement. I'll just take a page from Prince and refer to them as the group "previously known as Yuppies" and ask the obvious question. If boomers look at their assets and need to raise money, how many will sell their life insurance policy using life settlement to maintain their current lifestyle? This summary looks at the drivers which make this a legitimate question, and points out some of the likely implications for financial planners, insurance firms and settlement companies. Many financial planners are going to quickly get religion about life settlements. Life Settlements have remained on the sidelines, rarely discussed with clients, and rightly so, since it is not appropriate for every situation. About seven years ago the adolescent life settlement industry suffered a bout of pimples, and planners who wanted to stay squeaky-clean stayed away from them. The Coming Insurance Meltdown by Mike Larson 10-31-08 But there are three cataclysmic events converging which will make it essential for planners to have strategic relationships with a life settlement broker. At the end of the day, life settlements like any business, is a relationship business. Many financial planners have relationships with insurance agents, but as competition intensifies we expect financial planners to contact life settlement firms directly. We are seeing smart planners beginning their quest now to develop relationships with firms like Coventry, Peachtree, and up-and-comers like Life Asset Consulting. Life Settlement brokers should expect considerable scrutiny as the market matures. Reputation and experience will be key determinants in this industry as industry regulation is certain to move quickly to assure fiscal and ethical responsibility in the midst of our current financial situation. Financial planners can find a qualified life settlement broker by contacting the Life Asset Settlement Association, or visiting Cash out my life insurance. 1. A Rising Tide floats all boats - Demographics will drive this market just through sheer numbers. Within the next few decades, the market is projected to increase ten fold to become a $160 Billion dollar market. Baby Boomers, those born between 1946 and 1964, account for 77 million of the US population and estimates project that a boomer will hit age 60 every seven seconds for the next 18 years. Over the next three years, the leading edge of the boomers will reach 65, the typical target age for most life settlement funding sources to offer a settlement which exceeds cash surrender value. Here are some more raw facts on this aging boomer segment:
2. Tidal Wave of Institutional Investors -Gordon Gecko once said that "Greed is good." Institutional funding sources are flocking to vehicles that offer guaranteed returns. For the conservative portion of their portfolio, they must shun the volatility of global stock markets and the sound of "jingle mail" (home owners mailing their keys to banks) which jumps the default rate and puts repayment of trillions of collateralized debt in jeopardy. Merrill Lynch recently predicted (Jan 2008) that housing prices may drop 30%. The good news is that housing will be more affordable for the majority of US citizens. Let me try to put some perspective on the Merrill Lynch prediction, which if accurate, would represent some $6 trillion in wealth. Other articles also suggest that the average drop over time should be about 28%, but they "add back" an average 12% increase in rents to arrive at their rationalization that prices really only need to drop 16% to meet the average 28% decline. Let's be optimistic and chose the lower figure; 16% , a $3.2 trillion dollar haircut in US assets still sounds like "Iceberg dead ahead, Captain Smith." We may be looking for some safe places to put money as we enjoy the orchestra playing on deck. To put this in context, the 2008 Federal Budget was $3.1 Trillion. (using cash accounting- Click here for Audited Figures-which calculates the debt much higher) At the time of this writing, the entire US Debt is $9.2 trillion; the capitalization of the US stock market is about $17 trillion. In March 07, the capitalization rate for all stocks in the world was around $50 Trillion. A trillion doesn't mean much to most folks because we just don't have to form a relationship with a trillion of anything. Current estimates put the number of stars in the Milky Way at somewhere between 100 and 400 billion, a trillion is more stars than we can find in the Milky Way. Three to six trillion stars would light up the night sky six to twelve times brighter. If the housing decline were represented by stars, it would be hard to sleep. (in both cases) Suffice to say, Investors will be scratching their heads to find a safe place to park their money. Enter Life Settlements. Nothing is more certain than death and taxes. making the life settlement business potentially the only business whose outcome has certainty. This certainty will attract a lot of capital not only from institutional investors, but ultimately from regional banks and private equity. As long as the insuring carrier remains solvent and has the capacity to pay the death benefit, this market should be one of the few that offers a certain payout. And what if your AAA rated carrier is no longer rated triple A because they have invested a lot of money in "safe" exotic assets. How many of you would consider shifting the payoff risk to a life settlement funding institution and taking the money and reinsuring with another AAA carrier? How much money do you owe the Federal Government? Nearly Half A Million Dollars! 3. Tsunami, what Tsunami? The third driver for this market is intermingled with the first two. A third of the boomers have no retirement plan. So if the stock market has been unkind to seniors and their homes are depreciating assets, surely we can rely on Social Security to carry us through. Ok, we have been told for the past 30 years that it is seriously under funded. In 2002, Allen Greenspan warned that social security will be insufficient and "that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver." Fortunately, the boomers have been working diligently over the past six years to fix this. (note to self: one of my fact checkers is having a problem verifying this. They say we haven't done anything.) Some seniors may be forced to look at the only asset that still has tangible value. The surge in the number of people reaching retirement age who will have a requirement for cash, combined with a tight credit market and shrinking asset classes unfortunately may make a Life Settlement a logical alternative for people needing cash. Clearly, this is not the market that is being served today, nor should it be. I'm not advocating that boomers begin to tap their life insurance policies like many did their homes. However, the reality is that some percentage of the boomer generation will have a "real or perceived" immediate need for cash. That need, coupled with the investment community's creativity for marketing, will probably introduce change in this market to make it a new source of capital. Imagine Howie Mandel on the phone with you making you an offer to settle your $1M policy for $500,000 now with the briefcase girls behind him singing "you can't take it with you". If Madison Avenue can train us to call death insurance life insurance, lets' not underestimate their ability to package life settlement in a form that is not currently mainstream. Even if only a small percentage of the 77 Million boomers tap their policies for day to day living expenses, that could be a significant number, a number large enough to push the life settlement market above current forecasts of $160 billion. And with increased competition from funding sources, today's current payout ratios could increase to the benefit of the consumer. Therefore, even if the number of settled policies is the same, the $160 billion market forecast may balloon due to different investment objectives of the funding source. And sadly, this cash-poor segment of the market will probably not have access to a financial planner, the very segment that needs it most. What is worse, history shows that when cash-starved people that get a "windfall" many are often broke in two years as are a very high percentage of lottery winners. One more reason that legislation is likely to increase in this field. Maybe they will legislate that Life Settlements can only be handled by qualified financial planners. Given these observations, Life Settlements will probably be increasingly discussed in mainstream news for better or worse, over the next decade. | ||
