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What the Life Settlement Industry Can Learn From the NFT Craze

By Stephen E. Terrell

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What You Need to Know

  • A non-fungible token is an asset that's hard to trade for another, seemingly similar asset.
  • Life insurance policies are associated with insured characteristics that may reduce policy fungibility.
  • One valuation obstacle is determining the provider's and the broker's share of the deal proceeds.

The founder of Twitter recently sold his first tweet using a digital tool known as a non-fungible token or NFT.

Using blockchain technology, he was able to sell a unique digital version of this first tweet at auction for $2.9 million. Pretty amazing. Any of us could take a screenshot of his tweet and duplicate it thousands of times, like any other digital image, but this technology has made it possible to create a unique digital version of something with an NFT.

The term fungible has always been fascinating to me, particularly as it relates to life insurance — which is also non-fungible in its own way. What’s interesting today is that while a life insurance policy is non-fungible, the life settlement industry seems to treat policies in a different way which ultimately hurts agents and their clients.

Not a Dozen Nails

Before you think I have gone off the blockchain deep end, let me explain. First, what’s a fungible item? Anything that is interchangeable with the same value is fungible. If you go to the hardware store to buy a dozen nails, you can reach into a bucket and pull out any 12 nails, and they are each worth the same amount of money. The nails are interchangeable and have the same value — fungible. Now consider a piece of art, like a painting or a sculpture. It’s unique and so is the value. You can’t make an even trade between a Monet and a Picasso — non-fungible.

I argue that life insurance is a non-fungible item. While many $1 million life insurance policies may be out there, there’s usually only one written on a particular individual with that person’s unique characteristics: age, height, weight, health, etc. Life insurance policy — non-fungible.

In some cases, non-fungible things are worth more but not always. However, I think a problem arises when non-fungible items are treated as if they were fungible. This happens in the life settlement industry.

The traditional process of determining a life insurance policy’s value is incredibly murky. In fact, the marketplace for life insurance policies is far from transparent. When a life insurance policy is sold as part of a life settlement, oftentimes the actual value is not known by the seller or their agent.

What a Policy Is Truly Worth

In a traditional life settlement scenario, after an agent and the client discuss a life settlement, the policy information will be sent to a broker who then shops the policy to different provider companies. That’s where the dark arts come into play. What happens between the provider and the broker is in most cases completely unknown to the agent and the policyholder. The broker will come back with an offer but never tell the policyholder how much the policy is truly worth. They are playing around with the value equation.

For example, a policyholder is offered $100,000 for a life insurance policy with a $1 million death benefit. The client thinks it is great because they were thinking about letting it lapse anyway. However, little does the client or the agent know that the provider got a much larger amount for the policy from an investor and took a sizable cut. Then the reduced amount goes to the broker who takes another, often unknown, percentage off the top. Only then is the so-called final offer made to the client.

The client might be receiving 90% of what the investor paid, or 50% or even 30%. The provider and broker will say that the offers are standardized, suggesting that all insurance policies are alike. They are saying they reached into a bucket of policies that were all the same and the “offer is the offer.” Somehow, during the life settlement process, the client’s policy has become fungible — and less valuable.

The reality is that every life insurance policy is unique to a single person. While the terms may be common, there’s only one policy with your client’s name on it, with your client’s medical history, and with your client’s age, height and weight. Brokers and providers want you to believe that the market is tight and that your client’s policy is not unique. The offer on the table is the best that you can get.

Yet how can you judge an offer if you don’t know what the policy’s true value is? If you don’t know what the provider paid and how much the broker made, how can you truly judge the value of the settlement?

The Way Forward

The life settlement industry needs to do a much better job at providing transparency. Agents and their clients need to be better informed about the value of policies before starting the life settlement process. Most importantly, they need to understand the complicated commission process, so they can see how providers and brokers are chipping away at the client’s wealth.

Life insurance settlements are not nearly as complicated as NFTs, but both deal with non-fungible items. The big difference is that life settlements can be of tremendous value to most of an agent’s clients — and you don’t need to understand blockchain to determine the value.

Stephen E. Terrell is president of LifeGuide Partners, LLC, a company that generates current market values for life insurance policies for agents and their senior life insurance clientele. He can be reached at (888) 484-3350 and on Twitter at @Tweet_Stephen.

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