Many Advisors Have No Idea What Life Policy Assets Are Worth: Jay Jackson

What You Need to Know

Abacus hopes to go public through a SPAC merger by July.
For at least one group of policies, the average policy purchase price was about $250,000.
One company goal is to increase advisor awareness of the life settlement market.

Jay Jackson is hoping that one effect of making Abacus Settlements a public company will be more retail financial advisor awareness of the life settlement market.

Abacus is trying to go public through a merger with East Resource Acquisition Company, a special purpose acquisition company, or SPAC, with a listing on the Nasdaq Capital Market.

A majority of RIAs may know that clients can borrow against their cash-value life insurance policies, but only about one-sixth seem to have a good understanding of the resale market for life insurance policies, Jackson said in a recent interview.

“You should absolutely know the value of this asset,” Jackson said.

Failing to include life insurance policy resale value in asset totals may lower an advisor’s assets under management by 6% to 8%, Jackson estimated.

What It Means

The Federal Reserve’s financial accounts tables for the third quarter of 2022 show that U.S. households and nonprofit organizations have about 5% of their $108 trillion in financial assets in checking accounts.

That suggests that, for many retail advisors, the potential value of clients’ life settlement-related assets could be roughly comparable to the value of the cash in their checking accounts.

Life Settlements

Term life policies sold in the United States do not have a cash value for the policyholder. Permanent life policies, such as universal life policies, variable life policies and whole life policies, do have a cash value.

Policy owners can use special provisions to convert many term life policies into permanent life policies.

The life settlement market gives clients who have life insurance policies with a cash value and a relatively low estimated life expectancy a chance to sell the policies to investors.

U.S. life settlement companies bought about $4 billion of the $233 billion in life insurance coverage that lapsed in 2021, according to a proxy statement that Eres filed with the U.S. Securities and Exchange Commission.

Abacus Settlements

Abacus was founded in 2004. It now has relationships with about 30,000 financial professionals, and it also seeks out suitable policies by advertising directly to consumers and working with life settlement brokers, according to the SEC filing.

The Orlando, Florida-based company bought or helped with the purchase of 371 life insurance policies during the first three quarters of 2022, up from 309 in the first three quarters of 2021.

The company provides detailed information in the filing about some policies held in an investment fund. For the 265 life settlement deals originated for the fund in the first three quarters of 2022, the average age of the policyholders was 74.

The average policy in the fund offered $1.4 million in death benefits, and the average purchase price was $253,000, or about eight times the policies’ cash value.

The Opportunity

Abacus based the estimate that life policy resale value could account for about 6% to 8% of a typical advisor’s assets partly on an assumption that a typical advisor has 100 to 500 clients, with two-thirds having owned life insurance and 30% being old enough to be of interest to life settlement companies.

The Challenges

One challenge facing Abacus is life insurance companies’ moves to increase policy owners’ cost-of-insurance charges.

A second challenge is efforts by some life insurers to use higher-than-normal cash surrender value figures if certain owners give up their policies. That, in effect, puts the insurers in competition with the life settlement companies, Jackson said.

But Jackson said that, in some ways, the enhanced cash surrender value initiatives validate the value of what life settlement companies do.

A third challenge is the mortality forecasting uncertainty created by the COVID-19 pandemic.

It’s still not clear whether COVID-19 significantly shortened the lives of many insureds who would have lived for several more years, or if the pandemic simply accelerated the deaths of insureds who already had short life expectancies, Jackson said.

A fourth challenge is the reputation concerns created by some life insurers’ hostility toward the life settlement concept, and problems at earlier life settlement companies, such as Life Partners, a company that eventually failed because of reliance on overly pessimistic life expectancy estimates.

“Continued public opposition to the life settlement industry, as well as actual or alleged wrongdoing by participants in the industry, could have a material adverse effect on the company and its investors, including on the value and/or liquidity of the company’s investments,” according to the Eres proxy filing.

But Jackson predicted that public education and the need for the life settlement market will win people over.

“This is a real benefit to people with policies, and it’s a real benefit to the investors,” he said.