Life Settlements

The secondary market in US life insurance policies, also known as life settlements, offers investors the opportunity to purchase life insurance policies at a discount to face value. The life settlement market exists because sellers of life insurance policies receive a higher cash value than the surrender value offered by insurance companies. The investor buying the life insurance policy continues to pay premiums until the demise of the insured, at which point, the insurance company pays the face value to the investor.

To sellers of life insurance polices the secondary market offers an attractive alternative. Traditionally, policy owners received little, if any, economic value from policies they no longer wanted, needed or could afford. In fact, even today, many policies simply lapse. The value of lapsed policies is enormous. According to the Life Insurance Settlement Association (LISA) www.thevoiceoftheindustry.com an estimated 90% of all policies issued lapse before paying a claim.

Conning Research published a report in October 2010 which states "The life settlements industry was hit hard by the retreat of investor capital through 2009, following both the financial crisis and market specific issues of the prior year. Our 2009 estimate of $8 billion in face value of new policy purchases represents a decrease of 36% from the prior year estimate. This drop in annual settled values stems from structural resets in the life settlement market, as investors grew more cautious about longevity risk in the asset class."

As past issues are being resolved, the life settlements market is expected to grow to over USD 160 billion in the coming years according to forecasts from the research firm Sanford C Bernstein. An important factor contributing to this growth is the fact that large institutional investors are attracted by the uncorrelated returns and are beginning to invest in life settlements, either through purchasing physical life insurance polices, or through entering into a swap with a major financial institution. The key investment features making this an attractive asset class are high yields combined with good credit quality and low correlation with bonds and equities.

Currently, the pricing in the life settlements market remain at distressed levels. Both the regulatory environment and historical issues with inadequate quality of life expectancy underwriting motivates sellers and discourages buyers, thereby creating a buying opportunity. Expected returns remain attractive, particularly in the current low interest rate environment. The valuation of life settlements is based on relatively stable actuarial tables and expected returns have become more predictable in view of improved medical underwriting standards, although the choice of medical underwriter remains a key decision for investors.