Startup Founder Hopes to Help People Find `Ferrari in the Garage’ by Taking Life Settlements Mainstream
Lucas Siegel, the founder and chief executive officer of Harbor Life Settlements, wants to make the life settlements industry resemble how homes are sold and bought online. By doing that, he’s hoping his company and the larger industry will grow by making the process more transparent and navigable for consumers.
- Terrence Dopp
- August 2022
- Marketplace: Harbor Life Settlements is looking to create an end-to-end process like Zillow or eBay that allows people to determine the value of their life insurance policies and list them for competitive bidding.
- Overlooked: With a mix of resistance on the part of life insurers and a market that can be confusing, the life settlements industry is valued at $7.3 billion a year, although Siegel and others say it should be even bigger.
- Lapsing: Each year, many consumers let their life policies lapse with just the cash surrender value covered by providers. Siegel and brokers already in the space want to see that change.
At first glance, the real estate market isn't an obvious comparison when it comes to anything touching on the life insurance industry.
Yet the property market is exactly where Lucas Siegel, founder of Harbor Life Settlements, is looking for inspiration as he tries to grow both his company and the settlements space beyond a niche and into the mainstream.
He's looking toward the “Zillowfication” of a previously opaque world: creating an open market for buying and selling policies—akin to the online real estate portal that he hopes builds consumer confidence and entices more into the industry. Along the way he wants to make selling insurance policies a go-to component of finance to the benefit of individuals and the larger industry.
“We see the asset class, and the future of this asset class, as something that should be created off a template of real estate,” Siegel said. “If you were selling your house, would you sell it to the one guy with a sign that says 'We buy ugly houses?' Or would you put it on MLS [multiple listing service] and try to get a bunch of offers to try and drive up the price?”
Siegel describes Harbor Life Settlements as really a marketing technology company operating within the world of life settlements rather than as an entity focused solely on insurance-related products. He said just 2% of those who would benefit from selling a policy wind up doing so.
“Every year in the U.S. there are some $200 billion in life policies that are lapsing that could have been sold. People just don't know,” he said. “That means 98% of the time people are just throwing away their assets that they could have sold.”
“We believe fundamentally that people have the right to know the value of their assets. Period. They have the right to know the value of their house. They have the right to know the value of their car. And they have the right to know the resale value of their life insurance policy.”
Harbor Life Settlements
At their most simple level, life settlements are the sale of life insurance policies for a sum that is above what the carrier would pay out for the cash surrender value but less than the full death benefit. The buyer of the policy must pay all premiums throughout the life of the insured, making life expectancy a critical part of the transactions.
According to a 2021 report by Conning Insurance Research, the life settlements market saw a fifth straight year of growth in the amount of face value settled in 2020 even amid the disruption caused by the COVID-19 pandemic. The virus could even be a factor in growth going forward as so-called COVID long-haulers look to settle policies.
The firm's average 10-year forecast of the industry's growth is about $233 billion and the outlook calls for annual volume of new settlements of $7.3 billion, both figures up from previous estimates. The industry is evolving more toward the direct-to-consumer market, the report said.
To grow it, Siegel is hoping to entice greater consumer interest through My Policy Predictor, an online tool that functions much like the online Zestimate real estate calculators on the website Zillow, which allow homeowners to gauge an approximate value of their home. Based upon that number, they can then decide whether to list the property.
On the professional side, the company also has developed an artificial intelligence tool that combs through the client books of financial advisers and flags those policies ripe for a settlement. Brokers can then notify people of the potential value.
In both cases, if the clients assume the price is attractive enough, they can then list the policy through an online auction site on which prospective buyers—hopefully—bid up the price. Harbor Life Settlements bought the underlying code for the exchange from eBay and the theory is similar in that a consumer will offer the policy and receive bids.
Siegel is betting that increased knowledge on the part of policyholders will translate to a greater comfort and willingness to sell.
“We believe fundamentally that people have the right to know the value of their assets. Period,” he said. “They have the right to know the value of their house. They have the right to know the value of their car. And they have the right to know the resale value of their life insurance policy.”
The prime benefits are twofold, he said.
First, expanding the market and making life settlements more common will create an enormous new source of liquidity for Americans, Siegel said. At the same time, he said every net-worth calculation prepared by advisers based solely on surrender values is wrong and the process will become more common through education and transparency.
It's also designed to take an underwriting process that traditionally stretches as much as three months and compress it into a one-minute stage driven by AI.
Siegel said life settlement underwriting has traditionally been painful and inexact, and he called estimating life expectancy “brutal.” Data-hoarding by carriers has been a long-standing problem, he said.
“They have all the data but they make money because 90% of people lapse their policy—they pay for 30 years and get nothing,” Siegel said. “The less transparent settlements are, the more lapsation will happen, which increases their net worth.”
Christopher Conway, a principal and chief development officer at life expectancy underwriter ISC Services, said insurance companies are in the business of taking premiums and managing money rather than paying death benefits. The marketing of life insurance as a needed liability rather than an asset has created a climate in which policyholders too often simply don't know selling a policy is an option.
“That establishes within the consumer's mind a different perspective about that instrument than it actually possesses or should be applied to it,” Conway said. “It creates in the public's mind a perception that this is not the van Gogh in the basement. It's an obligation and nothing more.”
Because consumers don’t know selling a policy is an option, “it creates in the public’s mind a perception that this is not the van Gogh in the basement. It’s an obligation and nothing more.”
In 2021, ordinary life insurance lapses fell to a 10-year low of 4.1%, according to Best's Special Report: US Life: Earnings Decline in 2021 Despite Highest New Premium Growth in Over Three Decades. To put that number in context, in 2020 there was a total of more than $55.3 trillion of in-force life insurance across the industry.
Yuhmei Chen, a senior financial analyst covering insurance-linked securities at AM Best, said the life settlements industry has gotten more attention since its beginning with viatical settlements in the early 1980s during the onset of the HIV crisis. In many states, regulations also have become more stringent, she said.
Settlements have faced pushback from the life insurance industry because lapse rates are factored into the business models and pricing of most insurance contracts, she said. As a result, some insurance carriers raise the cost of insurance for certain specific products. Still, Chen said the lack of transparency has crimped the business.
“What people talk about a lot are the hidden fees—the commissions to the broker and the providers' fees,” she said. “Brokers are supposed to work for the sellers, the policyholders, to get them the highest price to sell the policy but from the provider's point of view, they want to be able to buy a policy for the least price.”
Brokers retain a large amount of the control over the process and can factor in those fees, as well as their relationship with prospective buyers, as they present offers to clients. “As a seller you don't really know how many bidders there are because you get the information from the broker. I think that's the thing,” Chen said.
John Welcom, who is founder and CEO of Welcome Funds (JW), a life settlements broker in Florida, and chairman of the Life Insurance Settlement Association, said most states have regulations concerning transparency that include upfront disclosure of all fees and a full accounting of the bids JW receives for a policy.
“The fact is that transparency happens on a majority of the transactions that we close,” Welcom said. “Every regulated state has a different law and we have a notice of disclosure within our applications for each state so that we can comply.”
Steven Shapiro, president and chief executive officer at New York-based Q Capital Strategies, a life settlement provider and servicer, said as a buyer in the transactions he's worked with both brokers and bought policies on Harbor Life's platform. He doesn't see the two as mutually exclusive and said one possible outcome is consumers gravitating to whichever means makes sense in their case.
Brokers by nature gravitate to larger policies, while technology-focused solutions might be the right choice for people who are looking to sell policies with a smaller face value, he said.
“I think there's space for both of them. They're just two different approaches,” Shapiro said. “One is using a technology approach to the bidding process and the other is just using a more personal approach to relationships and calls. I think there's a place for both of them.”
Siegel said the technology and Harbor Life Settlements together will change the entire life insurance industry as it inverts the traditional model of how both consumers and advisers view settlements. “They've got a Ferrari sitting in the garage that they didn't even realize they had,” he said. “It's going to liberate financial advisers to give financial advice.”