Welcome to the My Private Network Podcast!
Interested in learning about private market investing concepts and opportunities available to you?
This week's episode features our co-founder and host, Bob Simpson, who gives you, the investor, a chance to hear from industry experts about why you should consider investing in life settlements?
Today's Expert Guest
Paul Tyers, FCPA, FCA, CFP, CIM
Managing Director
Wealth Stewards Inc & Life Settlements
Today's Questions of Interest
2:42 Paul, what's your story?
5:09 Can you talk about how you've championed consumer and business rights initiatives?
8:16 What do you mean when you talk about a secondary market for life insurance policies?
11:30 A life settlement firm pays more than the policyholder who gets $50-100K for a $300K policy?
13:10 Who makes the premium payments and when do investors get paid?
13:55 With life settlements, there's a view that seems like you are betting on people to die early?
15:00 Could someone sell their policy in Stockholm, Nebraska or Toronto if they don’t want to pay the premiums?
16:42 Why can you sell it in Ontario but allowed in Quebec?
18:29 How do investors get involved in Life Settlements or Loans?
18:57 Can you maybe discuss how investment in life settlements works?
21:02 For those looking for income, how often does your pool pay?
21:38 Life Settlements summary and corporate perspective.
Transcript
Bob Simpson: I'm Bob Simpson, your host and Co-Founder of privatedebtandequity.ca, a website to educate investors about concepts and opportunities in private markets. Welcome to episode four, where today we're going to explore a distinctive private investment opportunity, investing in life settlements. Now, if you're a avid TV viewer, you might have come across some commercials promoting life settlements on some of the U. S. television channels. In a Coventry Direct commercial, they mentioned that life insurance is a valuable asset that can be sold. They explained that the option to sell the entire policy or retain a portion of it without further payments is a possibility. They also emphasize the importance of not canceling a policy.
And this is, I think, really important, not canceling a policy or letting it lapse without understanding its potential value. Another company, Abacus Life, mentioned that their clients use the proceeds from the sale, from the use of life settlements for a variety of purposes, including donations to charities covering future medical expenses, boosting retirement funds, debt repayment, or funding their children's college education.
Now, if you've ever wondered why you don't see these kind of commercials on Canadian channels when you're watching hockey, like I usually am on a Wednesday night or a Saturday night, or you know maybe you're just watching CBC News, that you're not seeing commercials for life settlements on the Canadian channels. So today we're going to shed some light on this topic through My Private Network.
We're featuring a chartered accountant who approaches this subject with an entrepreneurial mindset. He believes that it is unjust that Canadian policyholders don't have the same rights as their American counterparts when it comes to selling their policies for a variety of different purposes.
Today's guest is Paul Tyers, who's been fighting Canada's large insurance companies to allow Canadians to sell or borrow against their policies and to help investors who are looking for income to allocate some of their funds to life settlements.
Now, before we delve into a conversation about life settlements, I just want to connect with Paul Tyers here today. Hey, Paul, how's it going?
Paul Tyers: It's going really well, Bob, and thank you for having me here today.
Bob Simpson: Yeah, you know, everybody has a story. I know that as it relates to life settlements, you've got quite an interesting journey that you've been on, but let's just talk about who you are and what you're about before we get going.
Paul Tyers: Absolutely, Bob. You know, I grew up in Southern Ontario, went to high school in Burlington, graduated from Wilfrid Laurier University in business. As did my wife and my daughter, both of who work with me today at Wealth Stewards. I've spent my entire career really in the financial markets. First with a major accounting firm, then with a bank, and since 1987 in the financial planning and investment management field.
Outside my day job, I participate on the board of directors of a life insurance company. We actually had a board meeting this morning. And several other private companies. An important part of my life is my Christian faith. And through Leader Impact, founded by Paul Henderson of 1972 hockey fame, I've had the privilege of rubbing shoulders with many like minded business leaders. And through another organization, Opportunity International, to help women in third world countries through microlending.
You know, over the past 25 years, Bob, as a chartered accountant and certified financial planner, I've had the privilege of leading a few financial planning and portfolio management firms.
Throughout my career, when I look back, I've attempted to keep my eye out for consumer oriented innovations that can differentiate our products and services from others in the marketplace. And I believe we're going to discuss one of those areas today, because it's very important to me that people get to use their assets as they see fit and in their best interest.
Bob Simpson: Yeah, Paul, I got to be honest that when I try to combine the words entrepreneur and accountant in the same sentence that just doesn't seem to fit together. But you know I've known you for a long time. You are one of several entrepreneurial innovative thinkers that I have in my private network. But aside from being innovative, one of the things that's always impressed me about your business pursuits is that you kind of like to take on champion, championing, no, that's not an easy word to say, but, um, you know, we'll go with that championing, say it again, consumer business rights and initiatives. Now talk for a moment about a couple of these things that you're involved in.
Paul Tyers: You know, Bob, it's an interesting question, and it really, it wasn't until you pointed this out to me a while ago. You know, early in my career, when I still worked for one of the large accounting firms, I was actually doing an audit in Toronto, and I realized that there were a lot of people in the High Park area that had nice large homes and yet they were in tax arrears. How did I know that? By doing the audit of, then it was called the Borough of York, well, that led to me thinking you know, those poor seniors. I had heard about this idea called reverse mortgages and I thought for the people who want to stay in their homes, could that be a fit?
So believe it or not, in about 1987, actually earlier than that, I got involved in writing my first reverse mortgage while I was still in public accounting. And it was to help a senior stay in their home. And we lent them the money so that they could stay there. So, in many ways, what we're going to talk about today has some similarities.
You know, that reverse mortgage market in the early days, it had a pretty negative connotation. And it wasn't until many years later, most of us see it on the TV all the time, ads for chipped reverse mortgages. It happens to be owned by Ontario Teachers Pension Fund. But I can tell you in the early days of reverse mortgages, when people really didn't understand it, it wasn't something that had a positive view. I think people often take the negative view. Well, that's one example.
The second example that comes to mind is really going back to my first profession, being a chartered accountant, and I was down in the U. S. at a conference for the AICPA. That's the American Institute of CPAs. When I learned that many of the American accounting firms actually were involved in the financial planning and wealth management business, their clients had the need for tax work. But they also have the need to manage their wealth.
So that led to me getting involved in the integration of wealth advisory services with CPA firms in the Canadian market. And I can tell you we're earlier in that trend, but it absolutely is moving along. And that's another example I think of it's the consumer interest that really makes for something that is going to be a good viable market. You need win wins, Bob, not win loses.
Bob Simpson: You do. Yeah, and you've been, you've been waging a battle against Canadian establishment, right? That, even if you go back and you look at the work that you did in the CPA area, you were really fighting, the institutions who were setting the rules and saying, you know what, there is a better way, which I think is a very noble cause. But before we go there, you know, we try on private debt and equity to keep the language simple. So people know what the heck we're talking about.
Just take a second and talk about what do you mean when you talk about a secondary market for life insurance policies?
Yeah, Bob, I think that's a fair point. I don't know that the term life settlement properly describes it. Anyhow, a life settlement is a financial transaction in which a policy owner sells their life insurance policy, actually, the death benefit is the value of it, to a third party or investor or company in exchange for a lump sum of cash up front.
Now, the policy owner, also known as the insured, receives a payment that is typically more than the cash surrender value of the policy. But less than the death benefit. Now after the sale, the new owner takes over the premium payments because they want to make sure that they get paid that to keep the policy alive and they become the irrevocable beneficiary so that they actually receive the direction of funds on the death of the insured.
Let me give you a bit of an example. I think it might help in understanding. Imagine a business owner goes to the bank to borrow a million dollars for his company. Let's assume he's 55 years old when he does this. Now it's not uncommon for banks to require the purchase of a life insurance policy that's assigned to the bank in addition to standard collateral.
Because if the business owner passes away, they just want to make sure that their loan gets paid back. And let's assume for a moment that the life insurance premiums in the policy are 1, 000 per month. You know, fast forward 25 years, the business owner has paid $300,000 for the coverage over the years, and he's repaid the loan, quite likely.
So really the insurance coverage is no longer needed. Now if you were to approach the insurance company to inquire about the value of his policy, their response would be, "as long as you pass away tomorrow, a million dollars is going to go to your beneficiaries." But I say, well, that's not the first, that's not the choice I was hoping for.
Secondly, they would say, well, the value of your policy is equal to its cash surrender value. Now, most typically, the cash surrender value hovers around zero. Occasionally, it gets up to 5 to 10 percent of the death benefit. So in that example, that would be 50, 000 to 100, 000 with a death benefit of a million dollars.
So hopefully that gives you an idea, Bob, of how it works.
Yeah, it does, but, but you're really saying here that a policyholder who maybe spent 300, 000 in premiums, now they did get the benefit of having been insured that they could have cashed in earlier if they, if they found that that was their first choice.
So, Paul, you're saying that a policyholder who had paid, say 300K, over the term of the policy, they did have life insurance for those premiums that they'd been paid, but they might only get 50 to 100K, and maybe nothing, is what you said. But, if they sold it to a life settlement, they might be able to get more than that?
Is that what you're saying?
Paul Tyers: Absolutely, Bob. So, across the board, and I know this because I'm a member of the Life Settlement Association down in the U. S., life settlements providers will pay, on average, three to four times more than an insurance company will pay on the cash surrender value. Now we call that the fair market value.
So it's fair market value to a life settlement company. It's all dependent on the age of the insured, the health of the insured, and of course the premiums that have yet to be paid. Many policies have zero cash surrender value. So a life settlement effectively creates value. Because the insurance company that underwrote the policy initially, there's no cash surrender value, they will pay zero.
Now most people can see how unfair it is that life settlements aren't allowed in the provinces if somebody's allowed to get three to four times what their insurance company would pay. But those are the current regulations. The insurance industry loves it. And that's why I'm so passionate about changing it because the very people that paid for the policy and bought it who have paid the $300,000, they're really restricted on what their options are.
It just ain't fair in my opinion.
Bob Simpson: Just ain't fair. Yep. And you're not saying three to four times the zero value. You're talking about the high end that they might pay. So remind me if somebody sells the policy, who makes the premium payments over that? They still have to be paid, right?
Paul Tyers: Absolutely, Bob. And so I think it's really worthwhile reinforcing this. The buyer of the policy takes over the premium payments for the balance of it. Why they need to make very certain that that policy stays in force is the terminology. And that they actually receive the death benefit that they've actually paid some money for.
That's where the value is for the investor.
Bob Simpson: Got it. You know, it is difficult to predict the future. We all know that it's not even difficult, but it's impossible to predict the future. But, you know, in your discussion of life settlements, it sounds a little bit like you're you're betting on people to die early?
Paul Tyers: Well, you're not the first person to mention that Bob but I can assure you that there is no intent for the person to die early or late.
Quite frankly, it's one of the certainties in life. We all know that. And it's really a matter of when that person is expected to pass away from an actuarial point of view. Now if you look at the life insurance business, Insurance companies all the time have to make predictions of how long people will live and that's how they actually set the premium payment.
So they don't write a policy and people pass away right away that they have enough premium years and time before they actually have to pay out a death benefit.
Bob Simpson: Yeah, so let's just talk geography. So let's say you've got a person in Paris. Somebody who lives in Nebraska or in Toronto, they could all sell their policies if they don't want to pay the premiums any longer, or if they want to get their hands on some of the equity that they have in that policy.
Is that right?
Paul Tyers: Absolutely. So there are a couple of points I'd like to make on, on that. The range of reasons why people might want to monetize the equity in that policy is maybe if they don't have any heirs. They may need the money now, or they might just say, you know what, the choice is I can use some of that money for a better retirement lifestyle today as compared to it going to my heirs on my death, or they might have a choice to say, you know, I'd like that grandchild to go to the Ivy School of Business, Bob, where you went.
Rather than that money be available to them when they've graduated and when I pass away. Now, just speaking about geography, back to this issue of regulation, a person can sell their policy in France or in the USA, literally in every state. But not here in Ontario, but they can in Quebec, and that's where the head office is for the life settlements company that I'm involved with.
Bob Simpson: Yeah, so I have to set you straight though. I did watch the TV series Suits, where the guy said that he went to Harvard. I actually did not go to the Ivy School of Business, but graduated from the University of Western Ontario with a math degree. So just to set it straight, I don't want somebody coming back at me on that one, right?
That's when, when, when you and I first talk, I probably told you Ivy, but I just don't want it recorded on here. So, I did say that at the time.
Paul Tyers: Absolutely. We want truth here.
Bob Simpson: Yeah, we want truth here. So now I may be a little bit behind in my politics, but you know, why not in Ontario? You said you can do Quebec, but you can't do Ontario.
Paul Tyers: Well, let's be honest, we all know that the large insurance companies are situated here in Ontario. We know that the greatest concentration of the Canadian population is here on Ontario. And so, historically, it goes actually back to 1934, when something was written into insurance regulation. And since that, insurance companies have been protecting that.
It doesn't allow somebody to sell their policy to anybody else. It's deemed to be trafficking. That was never the case in Quebec. There have been several lobby efforts made to change the regulations so that you couldn't sell your insurance policy in Quebec, but I gotta say that Quebec has rebutted that and so somebody can have the full rights as they would ownership of any other asset and they can sell their policy if it originated in Quebec.
Now one thing you have to realize is only 20 percent of all life insurance policies ever get paid out the death benefit. You see people stop paying and you can imagine as an insurance company if somebody has paid their policy like the example that I gave and they're 80 years old and they say, I'm not going to pay it anymore.
That million dollars never gets paid out, the liability's gone. That's good for the insurance company. Not so good for the policy owner who paid the $300,000 though.
Bob Simpson: Yeah, so we've mostly focused in this discussion about people who want to sell their policies. If we pivot a little bit and say, if somebody's interested in investing or allocating funds to the area of life settlements or loans, how do they go about doing that?
Paul Tyers: Well, Bob, with your support, we've got life settlements on the privatedebtandequity.ca website. So your listeners can get more information there or again in touch with you through the website, I understand, and learn more how to get involved.
Let me tell you that some high net worth investors love this investment because it's got some very, very interesting attributes.
Bob Simpson: Yeah. Do you want to give me some example of those?
Paul Tyers: Absolutely. So, you can imagine that if it's been underwritten by Sun Life, for example, pretty good likelihood that that policy, that Sun Life is going to be able to pay the death benefit when there's a death in the portfolio. By the way, the investment portfolio that we write is called Life Insurance Liquidity Options.
It's much like a mutual fund, and it owns a whole bunch of policies that, at this point in time, have all been originated in the province of Quebec. Well, as an investor, they have certainty that the policy is going to pay out, because they're big regulated financial institutions that have an obligation to pay that death benefit.
So it lends itself to a very steady return, not in terms of cash flow, but very steady growth towards the maturity in aggregate of all of the policies that are in the LILO pool. Second thing is, there's lots of diversification so that there are many policies in that pool and they're coming due at different periods of time.
When I say coming due, that means people are passing away. And so there's a lot of certainty in the fact that people's capital is protected. Second thing is it's got some very, very interesting attributes. I like it as a chartered accountant because the death benefit of all policies in the country payout tax free.
They're tax exempt and so when you take an aggregate policies that are sitting in a pool like this, when there's a death in the pool, it pays to the pool on a tax exempt basis and it creates what's called a capital dividend. Capital dividend is a tax free dividend that can be paid out to the ultimate investor.
So tax free is good, Bob.
Tax free is good. So what you're saying is that if an investor is looking for an investment that is going to pay regular, monthly, or quarterly income, that this might not be the choice?
Absolutely not. I mean, it's really for those people who don't need regular income that have non registered money that they can put into an investment like this, typically for a five year period of time or even longer.
And it's going to grow at a very nice pace. There are going to be periodic capital dividend payments or tax free dividends paid to them when there is a death in the pool. So it works very nicely for that, but it is not something for investment where people need that regular monthly or quarterly income.
Bob Simpson: Right, so I've been making some notes as we've gone along and you know, let me try to summarize what we've discussed here. So if you are somewhere in the age range of say 75 years or greater, you have a large insurance policy and you would like to see if it might be worth selling or borrowing against, and this could happen for a variety of reasons, especially if you have funds in non registered accounts or corporate accounts over $500,000 looking for relatively predictable growth backed by Canada's largest investment grade insurance companies.
And you're looking for something that has low volatility, low price volatility. And you're looking for something that flows tax free. I think we all pay enough taxes. And if we could find something that we don't have to pay tax on, that's way better. Maybe life settlements is something that somebody, um, somebody should discuss.
But talk a little bit about the corporate side, Paul, cause I think I might've jumped ahead just on some of the research that I'd done previously.
Paul Tyers: Sure. Well, I'm going to give you a nine out of 10 on what you recited. It's not $500,000 that needs to be invested. But it is a minimum of $50,000 that needs to be invested.
So, really important, let's face it, a lot of private business owners have money in their private company or they have paid that up to a holding company. That's very common advice from a tech, from a CPA's point of view. And so, that money, if they were to take money out of the corporation, normally they would have to pay a taxable dividend.
Well, if corporate money is invested in a life settlements pool, like Lilo LP, that money can be released from the corporation without it being a taxable dividend, but it could be a capital dividend or a tax free dividend. This is like gold in terms of the person who invests corporate money into a life settlements pool.
You'd never put all your money into that, but it's like gold in eventually creating the liquidity that you skip paying the tax on withdrawing the money from a corporation.
Bob Simpson: So thanks Paul, keep us updated on your efforts. Now for more information about life settlements, please visit privatedebtandequity.ca and click on the concepts tab and look on the list for Life Settlements. Now please don't forget to follow us on your favorite podcast platform and subscribe to our YouTube channel just to keep updated on new episodes. Please feel free to subscribe to our newsletter or click on the chat now button.
And I'm going to be there to answer your questions. If you want to talk to me directly, I am Bob Simpson, empowering you to become a knowledgeable investor, enabling you to make informed, high quality investment choices in guiding you towards realizing your financial goals and objectives. By opening doors to my private network.
The information contained in this podcast is for educational purposes only and should not be used to purchase this or any other concept discussed without consulting a professional financial advisor to determine suitability. Full disclaimers are available on privatedebtandequity.ca. Until next time, keep your head up and keep your stick on the ice.
Have a good day.