Under U.S. law, a life insurance policy is a transferable asset than can be sold to a third party.
A life settlement (or traded life policy) is an in-force US life insurance policy, generally for an insured aged in excess of 70 years with no catastrophic life impairments, which is sold by its owner to a third party, usually an investor.
The new owner of the policy will be responsible for the payment of the premiums and will collect the death benefit when the insured passes away. The seller receives a lump sum which is more than the policy’s cash surrender value (CSV) but less than the death benefit. Motivation for selling may include high premium costs, the need for liquidity, or changes in estate planning.
- 92% of policies are lapsed or surrendered prior to maturity
- $100b of policies lapsed or surrendered annually by over 65s
- 90% of seniors who lapsed their policy would have sold if they had known about life settlements
Source: LISA
Life settlements for policy owners:
Examples of actual policies sold as a life settlement:
Male, aged 89: $1m policy with CSV of $57,119
SOLD for $250,000
Female, aged 73: $5m policy with CSV of $(217,374)
SOLD for $560,000
Joint policy, insureds aged 87 and 88: $2m policy with CSV of $14,970
SOLD for $480,000
Male, aged 80: $500k policy with CSV of $34,617
SOLD for $81,700
Female, aged 97: $1m policy with CSV of $2,314
SOLD for $290,000
Sellers generally receive multiple times more than any cash surrender value (CSV) held in the policy.
Immediate lump sum payment with no liability for future premium payments.
Life settlements provide a strong alternative to lapsing or surrendering.
With the increasing emphasis on consumer choice, the life settlement market is now recognised as a sound alternative for U.S. consumers who no longer need, or can no longer afford, their life insurance policies.
The selling of life insurance policies in order to fund long term care is increasingly encouraged by legislators with many U.S. states adopting legislation requiring insurance companies to inform insureds (who are considering surrendering their policies or whose policies are in danger of lapsing due to non-payment of premiums) of the existence of alternative solutions including the life settlement market.
Life settlements for investors:
In 2001, the National Association of Insurance Commissioners ("NAIC") released the Viatical Settlements Model Act, which laid out guidelines for avoiding fraud and ensuring sound business practices.
Around this time, many of the life settlement providers that are prominent today began purchasing policies for their investment portfolios using institutional capital.
Since then, market practices and knowledge have significantly improved with 45 U.S. states now specifically regulating life settlements.
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$3t
in U.S. life insurance policies held by seniors
38m
life insurance policies owned by seniors aged over 75
Investment opportunity
Superior risk adjusted returns.
Very low correlation to all other asset classes and low volatility.
Solid potential for delivering returns in all market conditions.
Regulated and mature market with significant room for growth.
Strong social benefit within the ESG context.
