Life-insurance settlements rise from viaticals decline

Carole Fiedler, owner of Innovative Settlements in Greenbrae, obtains settlements for owners of life-insurance policies through a secondary market.

In April, North Bay Business Journal covered the related viatical market in a story about a Petaluma musician who invested $20,000 of his retirement funds, hoping for a 12 percent return on two life-insurance policies formerly held by patients with AIDS. They defied their calculated life expectancy and derailed the investment.

Life-insurance settlements involve policies with life expectancy more than 24 months; viaticals, less than 24 months.

Here, the Journal spoke with Fiedler on similarities and differences between the viaticals and life-settlements markets.

You have been selling life settlements for how long?

About 26 years, since 1991. That was before there was such a thing as a life settlement. At that time, it was called a viatical settlement, and it was only for people with a terminal illness.

That came out of the AIDS epidemic?

I was representing people primarily with AIDS, but it was available for people with any life-threatening illness.

They would sell their life-insurance policies for whatever they could get?

Exactly. I analyze the policy for buyers, companies in business specifically to buy policies. They come back to me with offers, sometimes multiple competing offers. I work to get the most for my client.

In a viatical settlement, a person with a $100,000 life-insurance policy would get 60 percent on the dollar?

Back in those days, some states regulated the amounts. That does not stand any more. If somebody had life expectancy of 24 months or less, they could expect to get 60 percent of the policy. If it was 12 months or less, they would get closer to 70 percent.

The shorter the life expectancy, the more money my client gets. We look at life expectancy and the premium expense, the cost to maintain the policy for the rest of the life expectancy plus a buffer.

Typically your clients would not be able to afford premiums on their life-insurance policies, or did they need the lump sum to buy medicine or something else in their lives?

In the earliest days, these were primarily people with AIDS. They were working and had large group life-insurance policies through their jobs. Then they get this diagnosis.

This is all before August 1996. We had big change then. Before then, they would go to the doctor and be told, you have AIDS, you have six months to live. So go have a good time. That's what these people were being told. They found out about this [viatical settlements] because these people spoke to each other, and their doctors told them what to do.

That's why this took off so well with AIDS, not because AIDS offered us in the industry anything that much different. We had an opportunity. I used to get referrals from the HIV-benefits coordinator in Kaiser [Permanente] San Francisco [Medical Center].

Instead of leaving money to heirs, they would cash in the policy and use the money to go on a trip?

Yes. Unfortunately, a lot of these people were not close with their families. Many of my clients were gay men. Most did not have children. They didn't have anybody to leave these large policies to.

Many bought cars. There were no strings attached on what they could do with the money.

In 1996, protease inhibitors got announced.

What was the typical range of face amounts - $100,000, $200,000, much more than that?

Even back then, they were going up to $500,000 or $1 million. Most of them were smaller, group policies. Premiums were so low, people were able to get more money for them.

Were these term-insurance policies or whole life?

I can work with almost all life-insurance policies. With AIDS, they were primarily group term policies.

Employer term-insurance plans?

Yes. I still do term policies, I just manipulate it differently. What does my client want to do? What are your goals?

In a typical policy of $200,000, the policy holder would sell that for 60 percent. You would take a commission of 5 percent or so?

Standard viatical commission was 6 percent of the face value of the policy [$12,000 on a $200,000 policy; $30,000 on $500,000]. Many people in the industry, because there was no regulation capping fees, were taking 8 percent, 10 percent, 12 percent.

It was outrageous. It was insane, there was so much business then.

I would take 3 percent.

The company that fronts the money, an investment group or fund, would take what amount of commission?

These companies, called providers, get their money from funders. There's a side deal I am not privy to. If the investor says, ‘I'm going to give you a line of credit for $100 million, go buy policies; here are the parameters,' they had a financial arrangement.

That's how providers would get paid, by investing the money. It was all very secretive, closely held. Some providers buy policies for themselves, with their own money. They're not supposed to.

Before 1996, were people who fronted the money for these buyouts getting returns of 12 percent, 15 percent? What returns were typical?

The sweet number, if done in the right way, was 12 percent. It's not a sure thing. If premiums stop getting paid, then there's no policy to pay off.

When the policy is purchased by the investor or intermediary, is there an amount set aside to pay premiums for a couple of years?

It's supposed to be that way. Different providers or funders would, if somebody had a two-year life expectancy, take at least four years' worth of premiums out. If done the right way, the premium money should be there.

In August 1996, when protease inhibitors came out, our only San Francisco provider, Dignity Partners, announced they were no longer buying policies from people with AIDS. That threw this industry into its first tailspin. There was a barrage of phone calls.

You had worked with Dignity Partners for some time by then?

Oh yes. I had sold them many policies. Very good company.

They stayed in the industry but stopped selling policies for patients with AIDS?

They got out within [about] five years after that.

They were dealing with terminal illnesses that were not AIDS at that point?

Exactly. As a result of protease inhibitors, most of these companies aren't around anymore. [About] 90 percent of life-insurance policies at that point were lapsing, and insurance companies were not paying them off.

Because the premiums weren't paid?

Exactly. Consumers who had policies get to a certain age and realize they didn't need it any more. Their [spouse] is gone, kids are grown.

Instead of cashing out the policy in any form, they would stop paying the premium?

Yes. Or they would let their cash value continue to pay the premium until there was no more [cash value]. The life-insurance industry hates us.

Before 1996, how many viatical policies did you sell?

Hundreds.

In 1996, were people with AIDS mostly surviving beyond two years?

Not in 1996. It took a few years. People didn't have access to these drugs right away. It alerted the industry that it needed another focus group. That led to life settlements.

The transition took about five years, and the term “viatical” fell into disuse as it became “life settlements”?

That was the industry trying to take the flashlight off of people with AIDS. They thought that if they lost the term “viatical,” it would be a whole new thing. That's not the truth.

It's the same thing?

Absolutely. It's the same process. I am looking for different things.

Now the underlying illness is pancreatic cancer, brain cancer?

I have seen many different illnesses. I consider it more by life expectancy. In order to be technically a life settlement, a person needs to be over 65 with a life expectancy longer than 24 months.

The term “viatical” never went away. HIPAA [Health Insurance Portability and Accountability Act, 1996] made the proceeds of viatical settlements tax-free, if the person used licensed companies and had life expectancy less than 24 months.

That year there was a split in the industry so that any case with life expectancy 24 months or less was a viatical settlement and 24 months or more was a life settlement?

Right. A lot of new companies popped up then trying to buy policies. There were laws regulating viatical settlements but no laws regulating life settlements.

It was a brand new investing frontier?

Yes.

Were life settlements eventually regulated?

Absolutely. [By the California Department of Insurance under Insurance Code Section 10113.3, added in 2009.]

For several years it was a largely unregulated market?

Wild West.

How big are most life-settlement policies?

Much larger, $1 million and higher.

Can life-settlement policies come into play in businesses?

Wineries have key-man policies on each other. If a key man in a business is going on retirement, instead of letting that term policy go [the company could sell it in a life-settlement transaction].

They sell them for 10 cents on the dollar or more?

It varies. I took a policy of $3.8 million and got $237,000 [about 6 percent]. I got a 50 percent settlement [$5 million] for somebody on a $10 million policy. It's a negotiation between the policy owner's representative and providers [of life settlements]. Life insurance is a piece of personal property, just an asset.

Would the commission on a payout like that be 6 percent?

It's all negotiable. On that [$5 million] deal I ended up with a $400,000 commission [8 percent).

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at james.dunn@busjrnl.com or 707-521-4257