Life Settlements
Overview:
Until recently, people with unwanted life insurance would either let their policy lapse when they couldn't pay for it or Surrender the policy back to the insurer for the cash surrender value. Senior Life Settlements — are a new type of financial service being popularized by specialized brokerages. . These brokerages sell your life insurance policy to institutional investors for typically three to five times the cash surrender value of the policy. It is a great opportunity for the seller to collect a larger settlement than the surrender value for an unwanted insurance policy.
Defined:
A Life Settlement is the sale of a life insurance policy by a policy holder to a third party investor(s) for less than the face value of the policy. The investor(s) plans to profit from the death of the insured by collecting more in death benefits than what it was purchased for.
How the Life Settlement Process Works
- Institutional investor supplies capital to a life settlement firm
- Agent or broker refers an existing client for a settlement transaction
- Client case is reviewed; life settlement firm makes cash offer for policy
- Client reassigns beneficial ownership of the policy to the life settlement firm
- Life settlement firm continues to make ongoing premium payments to the primary life insurance company
- Life insurer pays benefit claim upon death of the original policyholder to the settlement firm
- Returns are passed to 3rd party investors
Why to Invest
Although still relatively new, life settlements have proved to offer a valuable and predictable source of return for many types of investors and are poised to become a mainstream addition to investment portfolios in the future.
The market itself remains relatively untapped, with around $1 trillion in face value of polices lapsing or being surrendered each year in the US, of which $200 billion would be suitable for purchase by the Global Life Fund. Last year it is estimated that approximately $12–$15 billion was actually traded.
Completely detached from the ups and downs of the stock market, life settlements consistently perform impressively versus cash, equities, and bonds.
Market Overview
The United States life insurance market is estimated to have total insurance coverage of approximately $18 trillion. The value of polices purchased by the life settlement industry has grown from almost zero in 1998 to today being in the region of $12 to $15 billion annually. There is a sustainable and rapidly evolving opportunity for Life Settlements to become a significant asset class appealing to a wide range of private and institutional investors.
There are numerous drivers of growth in this market. One driver is that individuals in the US are living longer. As such, they may outlive the usefulness of their life insurance policies. As illustrated on the first chart below, the target market for life settlements (i.e., individuals above the age of 65) should grow by 90% over the next 25 years.
Pros:
- Retirement Income and Relief from Premiums
- Subsidize Retirement Assets and Long-Term Care Insurance
- Create more comfortable retirement years
- Eliminate or reduce future life insurance premiums on a new policy
- A more profitable and bigger payout alternative than surrender or lapse
- Fund a single premium Annuity/Life
- Fund the purchase of a needed survivorship policy
- Settle personal or business debts proactively
- Bestow cash gifts to family members or charities
- Maintain a lifestyle despite changes in finances or health
