November 16, 2018
What is a Life Settlement?
Selling your life insurance policy to an unrelated third-party is known as a life settlement transaction or simply a life or viatical settlement. When you sell your policy in a life settlement, you receive a lump-sum payout, an amount greater than the cash surrender value but less than the death benefit, for your policy at the time of sale. A life settlement is an alternative to policy lapse or surrender.
After selling the policy, the policy owner is no longer responsible for any ongoing premium payments. Also, your family members or beneficiaries will no longer receive a payment when you pass. Policyholders may sell their policies as part of their retirement plan or because they no longer want or can afford their life insurance policy.
The life settlement industry is a highly regulated business, with state insurance regulatory agencies responsible for the licensing and oversight of life settlement providers and life settlement brokers.
Life Settlement History
The right to sell your life insurance policy goes back to a ruling by the U.S. Supreme Court in 1911, Grigsby v. Russell. In that ruling, the Supreme Court said that life insurance policies are personal property and can be sold in the secondary market like any other personal property. The market for life settlements began to grow substantially in the early 2000s, as a viable alternative for policyholders seeking liquidity.
Life Settlement Asset Class
With over $20 trillion in life insurance outstanding and more than $3 trillion in new issuance and an almost equal amount of policy terminations each year, the life settlement asset class has enormous growth potential. In 2020, the life settlement market purchased over $4.6 billion face amount of life policies. According to Conning, the total face value of life insurance policies owned by life settlement investors is in excess of $20 billion.
Life settlement investors buy all types of life insurance policies, including universal life, whole life, and term life policies. Life settlement valuation is based upon the policy design (premium costs), and an underwriter review of medical records (a life expectancy report). Typically, policies with a death benefit of $50,000 or greater and with insureds over the age of 65 are considered by life settlement investors.
Life Settlement Investors
Life settlements are considered an alternative investment. As a general matter, investors in life settlements are institutional investors – that is, sophisticated investment funds that are professionally managed – and accredited investors. The typical investors include private equity funds, pension funds, specialized life settlement funds, family offices, and hedge funds. These investors are interested in life settlements for many different reasons, but some of the more common reasons fall into a few categories reviewed below.
Life settlement investments are non-correlated assets
Life settlements are considered a “non-correlated” investment due to the fact that the investment returns are not related to and do not fluctuate with typical investment products (stock market, bonds, real estate, mutual funds). The main factor in determining the investment return in life settlements is mortality assumptions and the ability to accurately project such assumptions and invest in an adequately sized and diverse pool of life settlements.
A typical “correlated” investment fluctuates with the stock market and bond markets based on the economic environment – interest rates, inflation, unemployment, etc. As a result, a life settlement is deemed to be a good way to add diversification to an investment portfolio. Life settlement investments are considered low-risk due to the lack of correlation to general economic conditions and assets.
Relatively high investment returns
Investors find that the potential investment rate of return in life settlements is higher relative to other investment opportunities with a similar risk profile – essentially a fixed income/bond-like investment with significantly higher double-digit investment return potential. In a life settlement investment, it is not a question of “if” the investment pays out, it is only a question of “when.”
When the time comes for a payout, the ultimate counterparty is a highly rated life insurance company. So, the credit risk is low-risk or basically non-existent, since the life insurance industry is built on a system of trust that death benefits will be paid out when a policy payout is due.
In addition, life settlement investors make sure that the life insurance company that issues the policies that they buy are credit-worthy. The financial strength rating of the insurance company provides an unbiased, third-party review of the company’s payment ability. In general, life settlement investors choose life policies with a life insurance company with a financial strength rating of A- (or equivalent) or better.
Favorable demographic trends
The population of people in the U.S. aged 65 and older is expected to almost double by 2060, while this group’s percentage of the population will grow from 15% to 24%. The average number of years a person is expected to be retired has increased from 7 years (in 1935, when retirement was “invented” by the social security program) to 22 years in 2015.
The life settlement market exists to address this growing part of the population that will need more and more retirement planning options. These demographic trends ensure that a greater pool of potential life settlement candidates offers a clear potential for an increasing market size. Life settlement funds see the trends as favorable signs of continuing growth.
Highly regulated industry
Life settlements are a highly regulated industry. Like all insurance products, the life settlement industry is regulated at the state level. Currently, 43 states regulate life settlement transactions. The regulatory system, in these states, requires the company that purchases a life insurance policy from the original owner to be licensed. That licensed company is called a life settlement provider or a viatical settlement provider.
The regulations are designed to protect both policy sellers and life settlement investors to ensure that the title is properly transferred from seller to buyer at the time of the life settlement transaction. In its early days, life settlements were loosely regulated. With the increased regulation, has come increased transparency and a better marketplace.
Law of Large Numbers
It is important to point out that for the life settlement investment thesis to perform to plan (low-risk, high rate of return), the life settlement investor must aggregate a sizable portfolio of policies. The larger the portfolio, the more likely the estimated performance of the portfolio will perform in line with such expectations.
As a policy seller, this is also important to understand as the policies being sold are part of a much larger investment strategy. Most policyholders will feel much more comfortable knowing that their policy is owned by a large institutional investor or life settlement fund, rather than another individual.
Who Do I Contact?
If you are interested in investing in life settlements, you should consult your financial advisor to see if life settlements are an appropriate investment for your portfolio.
If you are a policyholder interested in selling your life insurance policy in a life settlement transaction, you can contact us here, send us an email at email@example.com, schedule an appointment, or call us at 866-679-9410. You can get an instant estimate of the value of your life insurance policy by visiting the our life settlement calculator.