Life insurance policies are legally viewed as financial assets which may be sold to a third party at the owner’s discretion. A life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. Life settlements are an option for policyholders who determine that their current policy is about to lapse, is under-performing, or is no longer needed due to changes in the owner’s personal or financial circumstances.

Through a life settlement transaction, a policyholder can convert an unwanted life insurance policy into a lump sum cash payment. The new owner buys the policy at a discount to its face value and makes all future premium payments. The new owner receives the death benefit payable under the policy from the issuing insurance company. From the original owner’s standpoint, a life settlement typically is a better alternative to letting the life insurance policy lapse or surrendering it for a lower amount back to the issuing insurance company.

While life insurance is an important security feature for certain periods of a person’s life, there may come a time when it is no longer needed. In circumstances like the following, life settlements might make sense for a policyowner:

• They are considering lapsing a policy.
• They want to cash out a policy to help enjoy life with their family now.
• They no longer need their policy to support their family if they pass away.
• They have no viable beneficiaries for their policy.
• The premiums are too expensive and their policy is no longer affordable.
• They have immediate cash needs for a life event.
• Their estate liquidity needs are less.
• They need money to fund health care or assisted living costs.
• They want to take advantage of a convertible term option.

“The ability to sell their policies as a life settlement enabled policy owners to receive an amount more than four times greater than what they would have received had they surrendered their policies to their insurance companies.” – London Business School Study, June 2013.

Portfolio Stability:

Since the turn of the millennium, investors have suffered through several instances of major economic volatility, from stock market crashes to global events affecting the economy. For this reason, many investors and financial advisors have looked to alternative investments to help stabilize their portfolios. An investment in a life settlement offers an excellent way to earn a competitive return on your investment money, while at the same time protecting against these periods of economic downturns. “Life settlements are one way to reduce a portfolio’s exposure to sudden downturns in the stock and bond markets,”-Conning Research & Consulting, Inc. 2007 study, “Life Settlement Market: Increasing Capital and Investor Demand”. The life settlement market was established by institutional investors and Wall Street firms, such as Berkshire Hathaway and Deutsche Bank, who have invested in life settlement portfolios and have been aware of the advantages of this asset class for years.

Competitive Returns:

Investing in life settlements provides for the opportunity to earn attractive yields, particularly in today’s low interest rate environment. Projected returns for life settlement investments can typically range from 6% to 10% in a fully managed fund scenario, depending on different fund attributes. These returns are certainly better than any of the equity markets and major market indices since the new millennium hit. Given the historic performances and current economic, political and global landscapes, market indices could continue to be uncertain for the foreseeable future.

Confidence Levels:

The return on a life settlement is contingent upon the maturity of each life insurance policy, which occurs upon the death of the insured. The return is a function of the death benefit collected minus the cost to acquire the policy, the premiums paid to maintain the policy, and other policy servicing fees.

With the exception of “when” the policy will mature, all other costs can be reasonably estimated such that projections can be done in advance to illustrate the projected returns at various points in time. This sensitivity analysis provides a range of outcomes that can help investors quantify their decision making process.

The use of independent third parties to provide life expectancy underwriting provides the estimate of “when” the policy will mature. Independent underwriting firms utilize specific actuarial tables and in depth medical analysis to estimate life expectancies.

Strong Underlying Asset:

The underlying asset is the life insurance policy. The policies involved in life settlements are generally issued by highly rated insurance companies such as Met Life, Prudential, John Hancock, Mass Mutual, and New York Life. Many of these institutions have been in existence for over 100 years and represent some of the strongest companies in the world. The claims paying ability of these entities is independently reviewed by rating agencies such as A.M. Best Company and Standard’s & Poor’s (S&P).