Michael Freedman is the CEO of Lighthouse Life Solutions, who works with financial professionals who advise and assist policyowners with the sale of unwanted, unneeded or unaffordable life insurance policies. In this episode of Power Your Advice, Doug Heikkinen and Michael discuss how Lighthouse can help advisors access the value of their senior clients’ life insurance policies.
- What life settlements are, including how they are regulated
- The myths and realities of life settlements
- How advisors can help their clients take advantage of life settlements
Resources: Lighthouse Life Solutions
life insurance policy, policy, settlement, market, life, clients, advisors, insurance, financial advisors, seniors, sell, transaction, lighthouse, appraisal, consumers, consumer protections, year, access, licensed, older
Michael Freedman, Douglas Heikkinen
Douglas Heikkinen 00:02
Hello, and welcome to the Power Your Advice Podcast. . .
Michael Freedman 00:41
Thank you again for having me. Lighthouse life is a company that buys life insurance policies primarily from seniors. As you said, I've been in the market for nearly 20 years. We think it is an incredibly valuable tool for insurance producers and also financial advisors to be able to help their clients access the value of their life insurance policy, when they're no longer going to keep that policy. And that's what life settlements do. We started lighthouse life three years ago, we're about to celebrate our third anniversary, really as a way to grow market awareness, and to some extent disrupt the way the market operates. For really the entire time that I've been in the life settlement market, it has been highly intermediated -- a lot of hands in the way to get a policy from the policy owners who sell their policy and investors who buy those policies and aggregate those policies. So, our company is focused on originating those assets by advertising and marketing to consumers directly and working directly with financial advisors
, and insurance producers who help their clients access that value. So that's what really gets us to where we are today -- to be a growth company, a disruptive company, and delivering value both to consumers and to investors.
Douglas Heikkinen 02:11
What exactly is a life settlement?
Michael Freedman 02:14
What is a life settlement? A life settlement is the sale of an in-force life insurance policy. And just think about it this way: people take out insurance for all sorts of reasons. Maybe sometimes in their 20s because their cousin is selling insurance, or 30s, because they're starting a family, or 40s because the kids are getting older and getting ready for college and through college years. But there comes a time in the ownership of a life insurance policy that, almost inevitably, individuals are going to be faced with what to do with that policy? Should they keep it? Can they keep it? Can they afford to keep that policy
,? The reasons they took it out have changed, the kids are grown up. And oftentimes because of financial reasons. Life insurance policies become more expensive as people get older. And people's ability to afford those policies are challenging in retirement when they are living on a fixed retirement income. So when somebody doesn't want that policy any longer, they typically think about dropping the insurance. That's the lexicon that we use in insurance, whether it's your auto insurance and homeowners or your life insurance, you “drop” it. But with a life settlement, you can “shop” it. You can get the best value for the policy through a life settlement transaction. And life settlements pay policy owners significantly more than they will get if they lapse the policy - in which case they get nothing from the insurance company or a surrender in which case they get the cash surrender value, which is usually very depleted and a fraction of what it might have been and also well below what the value or the premium might be for that policy. Two national studies have looked at the life settlement market over a long period of time and shown that policy owners receive from four times as much to 10 times more than the policy’s cash value. So it [a life settlement] is the sale of a policy for more than its cash value. It delivers value to seniors and their families in retirement who are trying to achieve retirement goals or sometimes to just make ends meet. And that's really what life settlement is.
Douglas Heikkinen 04:24
Our industry tends to slap labels on things sometimes unfairly. What are the myths and realities of a life settlement?
Michael Freedman 04:32
Well, I think one of the biggest is that it's predatory; that it’s taking people's life insurance policies away from them. And that's the myth. The reality is that more than nine times out of 10 people are going to lapse or surrender their life insurance policies. Less than one in 10 policies that terminates pays a death benefit. They [policies] usually terminate in lapses or surrenders, so they're getting nothing or next to nothing. So we're not predatory at all. In fact, what we are is an opportunity for people to access the value of an asset that they created when they took out the life insurance policy, and that they gave value to year after year through premium payments. So it gives them [the life insurance company] that value when you walk away from a life insurance policy. And all you're doing [when you sell a policy] is asking the insurance company to honor the contract. Every life insurance policy has a right of assignment in it, which includes its ability to be sold. And in fact, I'll put on a little bit of a lawyer hat for just a minute. In 1911, the Supreme Court unanimously held that life insurance is
, “ordinary” property. And that part of its value as property is its ability to be resold. The Supreme Court said if you can only sell it to a limited number of people, it would be worth less than if you could sell it in an open market. So the reality is that people can get a good value for something they're not going to keep. And I think that's probably one of the biggest myths. And the other myth is that there is no regulation of this market and that it's a wild west. That’s something we hear quite often. It's not a wild west. The fact of the matter is that this is a highly regulated transaction. As we know, insurance is regulated by state insurance departments. 43 of the 50 states have laws regulating the transaction that provide consumer protections that exceed any other financial service transaction that you can get, particularly for seniors, that can be accessed in the market today. Those consumer protections include the fact that we as a company have to be licensed in each state we operate to buy the policies. And just think about that for a second. What do you have to be licensed to buy in this country? You don't have to be licensed to buy a car; you have to be licensed to drive it. You don't have to have a license to own a gun; you only have to register the gun. You don't have to be licensed to buy a home or stock. But to buy a policy, we have to be licensed, which subjects us to insurance regulatory form approvals, to investigations and examinations to other requirements that really protect the consumer. And one of the strongest consumer protections - because we're dealing with senior population - is that we are required, when any individual sells their own life insurance policy, to receive a certificate of competency from their doctor prior to us buying that policy. That protects seniors. And we like those forms of consumer protections. And as a result, because this life settlement market, is highly regulated throughout the United States, there are no reported consumer complaints being received by insurance departments, there is no litigation pending from consumers selling their policy. There is no legislation pending and no regulation pending. This is a well-settled, well-regulated market that should give , consumers as well as their advisors confidence. So, it’s not the idea that it's unregulated or a wild west, but, rather, you're dealing with people who are accountable, who are required to meet standards, and do so in a way that provides the value to seniors without any harm.
Douglas Heikkinen 08:28
How can financial advisors get their heads around this for their clients?
Michael Freedman 08:33
Well, I think it's a great question. The market is very small. It remains small. In 2019, the last year that data were available, there were less than 3000 life settlements done through the whole United States accessing about a four and a half billion dollars of death benefits. If you do the quick math, that means each transaction was about a million and a half dollars. So it means that a lot of people aren't accessing the market. Every single year, millions of life insurance policy owners are dropping their life insurance who could have sold their policies, who are 65 and older 70, who have had a change in their health. This market is significantly untapped. So financial advisors should think about this transaction of life settlements as a tool in their toolbox to help their clients who aren't going to keep their policies to find out first, does it have a value? Is there a life settlement value for that asset that they're not going to keep or that becomes a challenging next year or the year after next? So for them to access the market for their clients is to say “let's just get it appraised.” I mean, even if, you know, grandma dies, you appraise her jewelry; you don't just give it away, you see what it's worth. So the idea that having an appraisal service, which is what a life settlement company like ours is, is a way for the adviser to help their client maximize the value of the asset. And then what happens if it does work? If it does make sense, if it's the right thing to do for their client, they're getting significantly more than the cash surrender value and significantly more than zero if it's a term life or a lapsed policy. And that's money that they can help reinvest with their client to help meet those retirement objectives. So advisors should think about life settlements as a way to help their clients maximize the asset value for an asset I make this comment quite often, they're [a client] is sitting at home wondering “how do I make ends meet?” Right behind them is a file cabinet. And in that file cabinet is a folder, it's got a life insurance policy in it that could have more value than the equity in their own home. They just didn't know it. So recommending their clients get an appraisal, and helping their clients with an appraisal, is the best thing that they can do.
Douglas Heikkinen 11:02
Do you spend a lot of your time educating clients and financial advisors exactly what this is, and how they can do it?
Michael Freedman 11:10
Yes, we do, we spend a lot of time on the myths versus realities. We also spend a lot of time teaching the way that we understand the market. It’s like looking at a jewel under a jewelers’ lens, is that it's not cookie cutter, each policy is unique. The health and the life of the insured in the policy is unique. Their needs are unique. So there's a lot of time spent collecting information, and I'll talk a little bit about what's needed. But helping them understand the transaction helping them understand what we need and getting over some of those humps of resistance or misunderstanding, I should say the myths that we were talking about. So that really is that we do spend a lot of time. But again, I think it's growing in awareness and acceptance, and we're continuing to see growth in the market.
Douglas Heikkinen 12:06
You mentioned talking about what is needed. So yes, what's needed?
Michael Freedman 12:11
So the life settlement market is traditionally and typically a senior-focused market, because the way the transaction works, there's an investor who's going to buy the policy and hold that policy to maturity, for the life of the insured, and so it's really focused on 70 and older. And in most instances, there should be a change in the insured’s health from when they took out the policy. So, for instance, when they took out the policy, they were rated standard or preferred. And they're still standard preferred, there's not likely to be much of a value until the older years. So if there's a change in health-it could be diabetes, it could be cancer, could be cardiac, cardiovascular, other things that happen, obesity, but there's a change in health - that really creates the ability for the investor to present a value that that is worthwhile and significant. Not all cases are like that. However, because there are programs - and Lighthouse Life works with one, one program - which allows for healthy lives for people who are 75 and older, but who don't have any change in their health. And it's a very simple process for them to be able to access the market. But, generally speaking, it's somebody 70 and older, with a universal life policy or a term policy that's convertible, who isn't going to keep it who might have had a change in their health. At that stage. That's when you get involved. You get a life settlement company involved to get an appraisal.
Douglas Heikkinen 13:58
So you said you were celebrating your third anniversary, so things must be going very well. And word must be getting out. And you're you're doing great.
Michael Freedman 14:09
Well, we think so. We think we're heading in the right direction. You know, our company, lighthouse life has a program specifically tailored for working with financial advisors. As we've seen the move to fixed-fee, business and not commission-based business and we've seen more reg bi and fiduciary and suitability standards being imposed, life settlements meet, and our program meets, all of those concerns. Our program provides a suitability checklist for policy owners to complete, additional disclosures for the financial advisor and the broker dealers to be able to get comfortable that their client knows the transaction and what they're dealing with. We are growing in our relationships with financial advisors, again being an appraisal tool, and giving then those firms and those advisors the ability to get the appraisal from us. And then if that makes sense to sell their policy to have the life settlement proceeds be reinvested. So it's a good program that we're seeing a lot of success. And it's, it's one in which more and more broker dealers are saying, hey, in this age of an environment, it makes sense for us to make sure that we're giving recommendations that are suitable and in the best interest of our clients, even if it's a life insurance policy that may not be under reg bi, but make sense to give consumers the information about this market.
Douglas Heikkinen 15:43
What's the best place for advisors to go to
to find out more about you?
Michael Freedman 15:48
Well, thank you, they should go to our company's website, which is www.lighthouselife.com. We have a tab for advisors to access more information about our program. We have actually a quick appraisal calculator that's going up online in the next two or three weeks to help just at least get some initial sense of whether these policies make sense to go on with the further appraisal and the potential life settlement opportunity.
Douglas Heikkinen 16:19
Michael, thank you so much for joining us today. This is fascinating, and I wish you the best of luck. Thank you so much.
Michael Freedman 16:23
Thanks for having me.
Douglas Heikkinen 16:25
For everybody at Advisorpedia our producer Jakie Beard and the power your advice podcast team. This is Doug Heikkinen