Possible Development of the Life Insurance and Settlement Market in 2018
It was an eventful year for life insurance sellers and consumers alike. At the very end of 2017, Congress passed a new tax plan that President Trump then signed into force. Among other things, the tax plan made changes to two things that may well affect the secondary market for life insurance policies and make life settlements a more appealing choice to US seniors.
First of all, a 2009 IRS Ruling had its language reworked. Why is this important? It’s because Ruling 2009-13 made it more difficult for seniors to sell life insurance polices they no longer needed or wanted by requiring sellers to find out the cost-of-insurance of their policy. The problem was that the cost-of-insurance was known only to the life insurance company that issued the policy. In many cases, life insurance companies didn’t want to or couldn’t reveal the cost-of-insurance, making it effectively impossible for the policy to be sold. The new tax plan removed that requirement and changed the language, making it much easier to meet the IRS criteria required for a life settlement transaction to go through.
The second change to taxes comes in the form of doubled exclusions of $5.49 million (for a single person) and $11 million (for a couple) on estates. High net-worth individuals often bought life insurance policies, with large payouts, but also high premiums, to cover the expense of the estate tax on what their children, other relatives, or others would inherit after their passing. These highly-insured seniors and their financial advisors may now feel that there is less or no need for such a costly policy, and seek to liquidate it in a life settlement.
Another possible change brewing in 2018 and beyond is that actuaries – the people responsible for risk and uncertainty in business – are in discussion with the National Association of Insurance Commissioners about how to build upon, improve, and automate underwriting programs. Streamlining underwriting will help speed up the whole process of issuing a life insurance policy – and you can be sure that the same advances will soon be used by life expectancy underwriters working with life settlements. It will become faster and easier to receive a life expectancy estimate from an underwriter during the life settlement process, which will mean that the prospective seller of the policy won’t have to wait as long for the whole process to finalize. This can mean the difference between being able to pay for treatment of a rapidly-progressing disease or not, or cover the costs of something more positive – such as, for example, buying an appealing property that has come onto the market at a good price.
More baby boomers and Americans, in general, will join the ranks of those who are good candidates for a life settlement. With long-term health trends such as more women smokers starting from the 1960’s and 1970’s beginning to hit as well as obesity being a constant problem and pushing life expectancy down, and, finally, the prescription drug epidemic still raging, 2018 will be another year that is bad for public health in general but good for those who are looking to sell their life insurance policies.
Without any unpleasant surprises, the life insurance and life settlement markets should continue to grow steadily throughout 2018. More people nearing retirement age will be thinking about purchasing life insurance policies to provide a financial cushion for their children, who may be growing up and building their lives in more difficult economic conditions, and more people who are past the age of 65 will be finding out about life settlements (and that obstacles such as the IRS Ruling 2009-13 have been removed) and the possibility of getting rid of unwanted, unneeded, or unaffordable life insurance policies in exchange for larger payments than simply surrendering those policies would provide.
The approach to tax reform and the economy taken by the current administration, as well as potential changes to or repeals of the Affordable Care Act, may also indirectly affect the primary and secondary life insurance markets. If the coverage provided by the ACA for various illnesses or conditions is scaled back, seniors might find themselves needing to pay out-of-pocket for various healthcare and medical procedures. That could certainly squeeze retirement savings and change their financial calculations. A possible way to pay for these new (or renewed) healthcare costs could be through the sale of life insurance policies.
All in all, 2018 is shaping up to be an interesting year with reason to be cautiously optimistic about the development of the life insurance industry.