Like crypto, the life settlement industry felt like the Wild West during its infancy, yet today, it's more mature, appropriately regulated, and offers opportunities for clients and investors.
Recent financial news stories have been eerily familiar. A misunderstood yet widely hyped industry with the potential to be incredibly disruptive to a staid, old-guard financial system took a massive criminal and reputational hit. Meanwhile, bad actors took advantage of unsuspecting investors by showcasing extremely attractive and ultimately unsustainable investment returns.
But I'm not talking about cryptocurrency, FTX, or Sam Bankman-Fried. In fact, when the scandal occurred, no one had even dreamed of cryptocurrency or knew much about the coming digital revolution. In 1999, The Wall Street Journal uncloaked a Ponzi scheme involving life insurance settlements that had the potential to destroy the then-nascent industry.
Much like crypto, life insurance settlements were widely misunderstood. The transactions grew out of the AIDS crisis, when terminally ill gay men sold their life insurance policies at a percentage of face value to have money to pay for medical expenses and end-of-life care because, at that time, an AIDS diagnosis was a death sentence.
Today, a life insurance settlement provides a needed financial option for seniors. The fundamentals of the transaction are the same, but the customer and the terms have evolved.
In the '90s, I performed some of the first life insurance settlements—and then watched as greedy and unscrupulous actors entered the business. Instead of advancing the merits of these transactions, they took advantage of people, stole their money, pillaged their life savings, and eventually went to jail. Sound familiar?
Like crypto, life insurance settlements fell under vague and archaic regulatory guidelines. The transactions were widely misconstrued and frequently vilified. And when some of the big players in the industry turned out to be con artists, many people predicted that the industry would disappear forever.
Twenty-five years and several drawn-out criminal and civil convictions later, the life insurance settlement industry has found a solid foothold in the financial planning universe. Though still somewhat misunderstood, a life settlement transaction is an invaluable tool for those who have unneeded or unwanted life insurance policies. And, to the chagrin of life insurance companies, the transactions provide an alternative to allowing a policy to lapse.
Like crypto, the life settlement industry felt like the Wild West during its infancy, yet today, it's more mature, appropriately regulated, and offers opportunities that make sense for the right types of clients and investors.
Today, a senior who wants to sell their life insurance policy can secure an appraisal, get bids from multiple sources, and then receive a cash payout that can help them pay bills, supplement retirement income, hedge against inflation, or maybe take the grandkids on vacation. The industry no longer worries about investment scams as the transactions are funded by major Wall Street institutions. Life settlements have become another instrument in a financial planner's toolkit.
Ultimately, the marketplace decided the best path for life settlements. The transactions meet a consumer need, but institutions and highly experienced investors best fund them.
We don't yet know how the crypto industry will respond to its crisis. Many commentators are making bleak predictions, and non-believers are having their “I told you so" moment. This too is analogous to what happened to the life insurance settlement industry a quarter century ago.
What crypto has going for it is that many trustworthy executives and organizations believe in its potential. The momentum behind the technology is significant, but the marketplace is still passing judgment as to what the industry will look like in the coming years.
Wm. Scott Page, a life insurance policy appraisal expert, is CEO at policyappraisal.com and WeBuy75.com.