The future of the life settlements industry seems bright, due to increased regulation and an increased confidence in the underlying asset itself. Through the public becoming much more aware of life settlements and legislators requiring, in some states, that the insurance companies notify insured's about life settlements options, the supply of policies in the life settlements market will hopefully increase.
The life settlements market is much more regulated than it used to be, with 42 of the 50 states now regulating life settlements in some fashion, according to a report from Life Health Pro. Through this increased regulation, in addition to various case law that has come out, it provides increased protection for potential investors in life settlements.
The elimination of stranger-originated life insurance (STOLI) has brought much more credibitility to the life settlements market by eliminating aspects of the market that the life settlements market was never intended to include. Through the elimination of STOLI, the market can return to focusing on those policies that are about to be lapsed or surrendered. While some insurance companies might still have some reservations about the life settlements market, the elimination of unreputable segments like STOLI helps to bring more acceptance of the market by insurance companies.
In addition, the American Taxpayer Relief Act passed last year significantly increased exclusions for estate taxes nationwide, raising them to $5.25 million for individuals and double that amount for married couples, meaning that a small fraction of people nationwide will have to pay these burdens. The small percentage that do have to pay, have a much lower tax rate than the previous 40 percent seen previously. With the tax burden for seniors significantly reduced, the need for life insurance to protect against estate taxes has been significantly reduced. This could lead to an increase in seniors with existing policies, who no longer have a need for them, to look toward selling their life insurance policy out into the life settlements market.
Texas is the first state to adopt new laws allowing funds from life settlement transactions to be used to pay for Medicaid long term care expenses. Prior to this regulation, insured's applying for Medicaid were only allowed to surrender their policy, but now they have the option of selling their policy for potentially much more than the insurance company was willing to offer. Many other states are looking at adopting similar types of regulations.
All in all, there is strong potential for growth in the life settlements market. While it has received some bad publicity in the past, the market has a bright future through increased public awareness and increased confidence in the industry itself. The realization that policyholders should be able to sell their life insurance policy to who they want is becoming more evident.