What are Life Settlements?

Life Settlements are a financial vehicle involving the discounted purchase of the death benefits of life insurance policies of United States persons or Senior citizens. The purchaser becomes the irrevocable beneficiary of a selected policy or is contractually obligated to the death benefit under a selected policy. Such vehicles offer a full face value fixed return paid by the specified insurance company.

History of Life Settlements?

Life settlement transactions date back to over 100 years ago. Life settlements, which are personal property, are the sale of a beneficiary's interest in a life insurance policy in a secondary market. Just like American's can sell their used property, they can sell also their life insurance policy. Owners of life insurance policies may have determined they have excess life insurance and desire to receive more than the cash surrender value by selling their personal property (a life insurance policy) on the open market for a higher cash value (the cash surrender value) than they would otherwise receive from their insurance company.

After a long history, this industry is evolving from an unknown asset class to a more recognized one that is efficient and professionally guided. With the development of an open market for life insurance policies, came the realization that the actuarial value of a life insurance policy is greater than the corresponding cash surrender value of a policy prior to the passing of the insured. A purchase of a portfolio of these outstanding policies allows the beneficiary to forgo the ongoing premium obligations and gain new found wealth for a policy previously considered a liability. The new owner now has the full right to be the beneficiary of the acquired policy. When the person named in the policy passes, the beneficiary (the new owner), receives the policy benefit. Thus, a life settlement has a contractual financial benefit attached to it which can be acquired and transferred when purchasing a life insurance policy that has a medically determinable life expectancy.

Policies purchased are usually underwritten by an 'A-' rated or better life insurance company which contracts to pay a benefit to the current owner's beneficiary. Policies purchased by investors generally involve policies issued on the lives of individuals with life expectancies greater than 2 years but less than 15 years, due to term requirements of these potential investors.

Studies on this industry include: Conning & Co., an insurance industry researcher, who estimated the potential size of the United States Life Settlement secondary market to be in excess of $134 Billion, JE McGowan Consulting estimated the potential secondary market to be greater than $18 billion dollars annually, and the Senior Market Advisor, March 2002, article entitled "If life settlements are good enough for Warren Buffett, shouldn't they be good enough for everyone else?" stated that Mr. Warren Buffett is actively involved in this industry.

Life Settlement Case Examples:

Life Settlement Case Example #1
Situation:	Corporate Owned ‘Key Man’ Policy - Owner of a retail business required an infusion of cash to pay down / eliminate debt, pay shareholder dividends, and maintain corporate stability as he was retiring and passing the business onto his children. The elderly owner held a $1,000,000 life insurance policy being used to secure against his death which was deemed to be no longer required as he would no longer be involved in the business.
Solution:	The life insurance agent recommended a life settlement on the policy.
Data:	Insured 79 Year Old Male Net Death Benefit: $1,000,000 Life Expectancy: 84 months Policy Type: Universal Life Cash Surrender Value: $61,368 Annual Premiums to Maturity (est): $39,750 Amount Paid to Policy Owner: $217,000
Result:	The life settlement proceeds netted the owner (the company) $155,632 beyond the cash surrender value and the proceeds from liquidating the buy-sell agreement totaled $217,000 in “found money,” which was used to address the company’s financial needs.

Life Settlement Case Example #2
Situation:	Following the death of her husband and discussions with her financial advisor(s) an 82 year-old female non-smoker began investigating ways to reinvest some of her assets to provide cash-flow for her grandchildren’s future university tuition. With her five grandchildren still being in middle school, she was in not rush however wanted to be sure to make the most financially beneficial decision to provide for them. Although she had not previously considered a sale of her universal life policy with a $2 million death benefit the option of a life settlement was suggested to her by her financial advisor to accomplish her goal.
Solution:	After a thorough examination she and her advisor began to pursue a Life Settlement as a best-case option.
Data:	Insured: 82 Year Old Female Net Death Benefit: $2,000,000 Life Expectancy: 66 months Policy Type: Universal Life Cash Surrender Value: $29,820 Annual Premiums to Maturity (est): $98,650 Amount Paid to Policy Owner: $396,892
Result:	Following the necessary steps, the insured was able to settle her policy for $396,892, significantly above the surrender value of $29,820. Following her settlement she promptly reinvested into the university fund with the assistance of her financial advisor.

Life Settlement Case Example #3
Situation:	An 81 year old insured learned that his only child was faced with the possible foreclosure on his family home as he could no long afford the mortgage payments as he recently lost his job. As such, the insured wanted to help his son however did not want to utilize his retirement savings. The insured did hear about the Life Settlement marketplace and through the sale of one of the two Universal Life insurance policies he owned this would provide him with a cost-effective way to assist his son with his current financial situation.
Solution:	The insured approached a life settlement broker to begin exploring the settlement on the one policy.
Data:	Insured: 81 Year Old Male Net Death Benefit: $1,000,000 Life Expectancy: 40 months Policy Type: Universal Life Cash Surrender Value: $51,653 Annual Premiums to Maturity: $47,500 Amount Paid to Policy Owner: $531,772
Result:	The life settlement proceeds netted the insured significantly more than he desired to give to his son. As such he netted $531,772, which was $480,119 beyond the cash surrender value and of the proceeds he gave $250,000 to his son and deposited an additional $230,119 into his retirement savings.
Note: The above case studies are for illustration purposes only and are not intended to be an indication of what a particular seller can expect to receive nor what a particular purchaser can expect to pay for the policy being sold.

What should people fully understand about Life Settlements?

There are four issues that should be considered before investing in Life Settlements: Liquidity, no monthly income, inexact maturities, and risk factors referenced in an offering memorandum (if available).

Once a Life Settlement is purchased, the owner must wait until maturity or resell a Life Settlement (if possible) to receive any monies from that policy.

There is no "guaranteed" monthly or annual income derived from Life Settlements.

Life expectancy underwriting is not an exact science; therefore, a Life Settlement could mature before or beyond the anticipated term.

Risk Factors are associated with Life Settlement investments therefore please fully review all documentation before considering an investment.

Why Choose Life Settlements?

Few financial products in the marketplace today offer the potential returns a life settlement may provide. Life settlements typically avoid capital market volatility and global market increases and decreases unlike traditional stocks, bonds, mutual funds, GIC’s, etc. Life settlements may provide both flexibility and security.

To diversify a portfolio, investors have noted they are considering adding investments that generally do not react in the same way to capital market fluctuations and which are not typically tied to interest rate fluctuations. Life settlements typically allow one to diversify and generate positive returns with collateral security.

What about safety?

Usually when Life Settlements are purchased the insurance policies are underwritten by insurance companies rated "A-" rated or higher (excellent) by A.M. Best (or its industry equivalent). Thus, your principal and return are supported by the insurance company's assets. Upon policy maturity, returns are sent directly to the beneficiary (or their trustee) by the insurance company. At policy maturity, principal plus profit is to be "paid in full" and is a legal right protected by law.

The Life Settlement Industry