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Life Settlement Offers Are Set to Drop Due to Soaring Interest Rates

By Wm. Scott Page

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What You Need to Know

  • When the Great Recession hit, many buyers simply went away.
  • This time, buyers could stay but pay less.
  • Some could keep the same prices in place until next year.

The secondary market for life insurance policies typically marches to the beat of its own drum.

From an investment perspective, the large-scale marketplace is not correlated to the stock market.

And the consumer marketplace, most of the time, has little to do with the overall economy.

Offers are computed based on the appraised value of the policy, and external economic factors rarely come into play.

However, the dramatic increase in interest rates is expected to affect policy offers by the end of the year.

The Past

Over the past 20 years, we have only seen one central economic scenario dramatically changing the life settlement market: the 2007-2009 Great Recession.

Many providers relied on institutional lines of credit, using borrowed money to purchase policies.

Interest rate fluctuations were rarely an issue.

During the recession, institutions did not raise rates, instead opting to pull lines of credit completely.

The institutions, like investment banks and hedge funds, didn’t make money more expensive; they instead removed the ability for providers to access credit at all.

And for a short time, the life settlement market, like other parts of the economy, collapsed.

Many companies folded, and the whole industry was turned on its head.

The Present

I don’t believe the situation is that bleak today, but we see some interesting changes due to rising interest rates.

Now, we are seeing very competitive appraisal prices while also hearing from our inside sources that appraisal values will soon drop due to rising interest rates and increasing costs of funds.

As the cost of money goes up, offers will go down.

Right now, and before the end of the year, we’re expecting bids to remain flat: We are not expecting any significant fluctuations for any current and accepted deals.

Most companies that purchase life insurance policies in the secondary market have some remaining “dry powder” funds borrowed at lower rates.

Again, they must have commitments to purchase specific policies on the books by year-end.

Implications for Clients

Agents and advisors with lukewarm clients who have not been motivated need to know that it’s best to appraise a policy now and lock in an offer.

There’s no guarantee that the policy will appraise at the same level in two to three months.

We’re expecting appraisal offers to drop at the beginning of the year.

We frequently suggest that agents and advisors secure a policy appraisal so that their clients understand the value of their life insurance policy.

This helps them decide whether they should sell a policy now or in the future.

Right now, this trend is making this appraisal even more critical.

We are locking in appraisals for about 60 days, whereas usually, we might tell our clients that they could be comfortable with the appraisal for 90 or 120 days.

How much offers will change has yet to be determined, but the high single digits are not out of the question.

For more comprehensive policies, this could mean tens of thousands of dollars.

We won’t know for sure until things start to shake out at the beginning of the year, but we see a change is coming.

With rising interest rates, borrowing costs go up, and we fully expect that life settlement offers will be a lagging indicator.

Find out what your policy is worth and let your clients know that, as rates fluctuate, offers will fluctuate too, but likely in the wrong direction.

The Future

The good news is that many companies that fund life settlement transactions remain bullish on the market, despite the rising rates.

The Great Recession was, hopefully, a one-in-a-lifetime event that most investment banks and hedge funds learned from.

The life settlement market remains robust even though offers will go down.

Lock in your client’s appraised rate sooner rather than later.

Wm. Scott Page (Photo: PolicyAppraisal.com)Wm. Scott Page is the CEO of PolicyAppraisal.com and of WeBuy75.com,

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(Image: Creativa Images/Shutterstock)

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