As the Great Recession started to take its toll, seniors increasingly looked for liquidity in non traditional sources for their retirement. Many were quick to embrace the relatively new strategy of selling their life insurance policies in life settlements. Seniors with unwanted life insurance policies were attracted to the prospects of quick cash. However, life settlements proved to not be the panacea everyone had hoped they would be.
The current challenge seniors face when evaluating liquidity options is that their assets are worth the least when they need them the most. During the Great Recession, real estate prices have been depressed, CD's yielded paltry returns and stocks have seen very large haircuts across the board. Unfortunately, stocks, real estate and cash are where most seniors park their money. Selling a home outright or in a reverse mortgage is tough because of the real estate market. Stocks are often underwater and cash in bank accounts are generating negligible amounts of interest. Some have been lucky with gold and bonds, but most seniors have been drastically affected by the dire economic conditions facing the world over the past 2 years. As seniors looked to sell life insurance policies as life settlements during the worst economic downturn since the Depression, they were again faced with a harsh reality.
Seniors found that the value of their life insurance policies on the secondary market was also affected by the Great Recession. As credit markets and liquidity dried up, the ability of financial institutions to buy life insurance policies decreased. Their dry powder was reduced so to speak.
Some seniors sold their life insurance policies for relatively low life settlement valuations. Some weren't as lucky. Many policies went unsold due to lack of demand. Many policies that would have sold two and half years ago were surrendered or allowed to lapse. Any life settlement broker will tell you that they were flooded with policies that they couldn't sell. The supply far outweighed the demand.
While life settlements are lauded as an uncorrelated asset class, it is important to remember that basic economics still drive the life settlement market. Unfortunately, those that forgot that lesson learned the hard way when they found out life settlements aren't a silver bullet to their financial woes.
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