The emergence of the life
settlement has created a great investment opportunity for savvy investors
who wish to invest in a new lucrative asset class, life insurance contracts.
A life settlement is the sale of an unwanted or unneeded life insurance
policy for a percentage of the policy’s net death benefit, said policy
covering the life of an individual whose age and/or current state of health
is such that independent analysis identifies them as having an ascertainable
and limited life expectancy. These policies usually insure individuals that
are 70+ years old. Insures of this age group have a relatively predictable
and short life expectancy. The investor purchasing the policy invests the
purchase price plus the premium cost to keep the policy until the policy
matures and earns returns from the life insurance death benefit. The insured
benefits from a life settlement because they receive a lump sum of cash from
the investor purchasing his policy.
How the Life Settlement process works:
- Institutional investor supplies capital to 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 pays agent / broker a commission.
- Life settlement firm continues to make ongoing premium payments to the primary life insurance company.
- Life insurer pays benefit claim upon the death of the original policyholder to the settlement firm.
- Returns are passed on to 3rd party investors( in this case MAXLIFE)
Sellers Rationale for Selling Policy
Individuals
- Needs cash for major expenses (e.g., medical treatments)
- Outlived need for coverage (i.e., all major expenses are paid for)
- Needs different coverage / different features
- Financial distress / unable to meet future premium payments
Family / Estate
- Change in beneficiaries (e.g., divorce, death of dependents)
- Second-to-die policyholder (i.e., spouse) has passed away
- Material change in the value of estate
Business
- Change in key executives / partners
- Change in succession plan (e.g., family business)
- Need cash / seek to monetize assets
UNDERSTANDING THE OPPORTUNITY FOR THE INVESTOR
- By 2030 there will be 70 million older Americans, more then doubling the 1990 number.
- In the year 2000 13 percent of the population was 65-plus. In 2030, the rate will increase to 20 percent or one in every five Americans. (U.S. Census Bureau)
- 47% of seniors over age 65 own life insurance . ( Bernstein Research Call)
- 59% of life settlements owners are between 71-80. (National Underwriter)
THE NUMBERS SPEAK FOR THEMSELVES
- Estimated $431 billion of life insurance in force.
- 88% of universal life policies never result in a claim.
- More then $17 billion worth of Life Settlements transactions will take place this year.
- The Market will grow to over $160 billion by the year 2030.
- Life Settlements are not correlated to other financial markets so they differ from Shares, Property, Cash and fixed Interest.
- The low volatility of the underlying investment (the face value of life policies) means they are not impacted by fluctuating stocks and bond markets, rising interest rates or oil prices, global economic instability or business cycles.
- Life insurance policies are capital stable so when a policy is bought the
- benefit is known.
- Yield is determined by time and not by market forces, so its not a question of if a return will be paid, but when it will be paid.
Portfolio Arbitrage:
While individual life insurance policies are valuable, portfolios of policies carry additional value. Portfolios of policies yield additional benefits such as increased diversification which is a key component to generating steady returns from life settlements. Institutional investors with large amounts of capital often purchase portfolios from life settlement companies for 15-20% more than each policy’s individual purchase price. This premium price for portfolios is generated due to the value of the diversified portfolio and the relatively low transaction costs of purchasing a portfolio (as opposed to purchasing individual policies from the original policyholder).
For example, assume we have spent three months to purchase life insurance and spent $200 million to acquire $1 billion in face value. While purchasing these policies costs us 20% of the face value of the portfolio, the portfolio could carry a true value of over 25% of the face value as a portfolio package. If the portfolio were sold for $250 million ($50 million profit) there would be a return of 25% earned in just three months. If this process is repeated four times a year, $200 million of profit may be realized.
This equates to an annual rate of return of approximately 100%. Please note that the aggregation of first portfolios of policies may take longer than three months as the work flow and processes are initiated.
Some of the active investors involved in the Life Settlement Industry.
- Warren Buffet – Gen-Re (started with $400 Million and is now at $800 Million revolving)
- Ontario Teachers Pension Fund
- Maple Financial
- Citibank
- AIG
- GE Capital
- Merrill Lynch
- U.S. Bank & Trust
- Deutsche Bank
- Suisse Re
- D&B Auto Bank
- Credit Suisse
- Abbey National Bank