A national life settlement broker is taking an eBay-like approach to the secondary life insurance market, linking cash-strapped policyholders with institutional investors.In April, Life Settlement Insights drew a handful of institutional investors online to test the open-forward auction format of a new venture called LifeX, an electronic communications network that runs on a proprietary auction platform from HedgeHog Inc. Executives with Cleveland-based Life Settlement Insights claim they've created the life settlement industry's first online exchange and are considering extending the capability to other life settlement brokerages.
Life Settlement CEO James Cavoli says institutional investors will purchase $10 to $12 billion worth of life policies in the secondary market this year. That level could increase if LifeX succeeds in trimming the typical two-week purchasing process down to 30 minutes.
"The industry today has a manual sequential process that is very outdated and very inefficient, and we believe the secondary life insurance market is a perfect product for the Internet," he says.
Policyholders who no longer need a specific life policy or no longer need to provide for a beneficiary can either get the policy's cash surrender value from the insurer that issued the policy, or let brokers such as Life Settlement Insights sell them to institutional investors.
Policies that are most attractive to institutional investors are those that cover older individuals who are paying low premiums and who are in declining health. Institutional investors purchase the policies from brokers, pay the premiums until the original policyholder dies, and then they collect the death benefit.
A higher placement rate
Cavoli says LifeX will provide a higher placement rate and a more accurate value for life policies sold through the secondary market.
"We represent the seller and our fee comes from the seller," he explains. "We take the policy and review it, assess its value, and then present the case to a series of institutions. The buyers negotiate a fair market value-the point at which no bidder will go higher."
Cavoli expects that by the end of the year, 80% of the life policies sold by Life Settlement Insights will be sold through LifeX, which was established as a separate company. He also envisions that in the future, other brokers will be able to sell their policies on LifeX "for a nominal fee."
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