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Why haven’t I ever heard of Life Settlements?

Because the cost to buy a policy is so high, this investment has historically been available to institutional investors only. Many large companies (e.g., Berkshire Hathaway, Goldman Sachs, AIG, Credit Suisse, Deutsche Bank) have invested in Life Settlements for years to supplement their portfolios due to the high yield potential, low risk and non-correlation to the performance of the financial markets.

What is a Life Settlement?

A Life Settlement is the sale of an existing life insurance policy by the policy owner to a third party for more than its cash surrender value. In the United States, nearly 90% of all life insurance policies lapse meaning that the insurance carrier never has to make a payment. To quantify, $1.5 trillion of life insurance policies either lapse or are surrendered annually. To combat this imbalance, several states have already enacted laws which require insurance companies to inform policy owners of the opportunity to sell their policies on the secondary market (i.e., a Life Settlement) when faced with the potential lapse or surrender of their policies.

What criteria are used to choose and price life insurance policies?

There are many factors which impact the value of a life insurance policy, including:

    • Gender, age, medical condition & history of the insured
    • Policy size & cash surrender value
    • Insurance company rating
    • Costs for future premiums & other policy expenses

Why would an individual choose to sell their life insurance policy?

Senior citizens choose to sell their policies because they are no longer needed or wanted. Some examples include:

    • Policy premiums have become unaffordable
    • Beneficiary is deceased or no longer has need for the death benefit
    • A key-man policy is no longer needed by a business
    • Policy owner is over-insured
    • Policy owner desires cash to:
      • Manage day-to-day living expense 
      • Start a new business 
      • Pay for medical bills 
      • Fund college for grandchildren
      • Take a vacation
    • Estate liquidity eliminates continued need for protection

How long have Life Settlements been around?

While their origins can be traced back as far as the 1880s in Europe, here in America, Life Settlements first gained exposure in 1911 with the landmark case Grigsby v. Russell where U.S. Supreme Court Justice Oliver Wendell Holmes ruled that a policy owner has the right to sell or otherwise assign the rights to their policy as they deem fit. In the 1980s and early 1990s, Life Settlements for the terminally ill, also known as viaticals, became a viable alternative for AIDS patients.

With nowhere else to turn, these individuals were able take advantage of this opportunity by selling their policies in order to pay their high medical expenses and hospice care. Until that time, the vast majority of Life Settlements were purchased by institutions since the cost to buy an entire policy is extremely high. In 1991, a new method (direct fractional ownership) was engineered signaling the dawn of a new age as Life Settlements were now available to individuals as well. Over the next 20 years with improvements in medicine, viaticals became less and less popular and the vast majority of the industry moved toward policy sales by senior citizens appropriately referred to as Senior Life Settlements.

Why would an investor want to buy someone’s life insurance policy?

Individuals looking for non-correlated investment opportunities are able to purchase these Life Settlements and turn a death benefit for a beneficiary into a life benefit for the living. Life Settlements provide an attractive investment alternative for institutions and individuals alike due to the reduced risk and potential for high returns which are not correlated to financial markets, oil/gas, precious metals or geopolitical events. With the Stock Market having crashed not once but twice in the last 10 years, Life Settlements have become a popular replacement to the daily ups and downs of Wall Street.