About Life Settlements

About Life Settlements

See also: Industry History

A life settlement is a financial transaction in which a policy holder possessing an unneeded or unwanted life insurance policy sells the policy to a third party for more than the cash surrender value offered by the life insurance company. The purchaser becomes the new owner and the beneficiary of the insured’s policy at maturation and is responsible for the premium payments during ownership. Often, the insured can receive two to three times the cash surrender value from this secondary market.

Life settlements are an important development in that they have opened up a secondary market for life insurance in which policy owners can better access the fair market value for their policies, rather than accepting the lower cash surrender value from the issuing life insurance company. In return, investors purchase these policies at a significant discount from their face value, often achieving an attractive mezzanine rate of return (IRR) upon maturity, but with only high investment grade risk. Both the original seller of the policy, and the investor, win.

FAQs

Can Life Insurance policies be sold?
Life Insurance polices are personal property. The law permits them to be sold and resold with all the normal protections of personal property law

Why do elderly people sell them?
The need for money for health care and living expenses, changes in estate taxes or not being able to afford premiums any longer

Why don’t they surrender the policy to the insurer for cash value?
Investors will pay more than twice the cash surrender value paid by the insurance company

How much selling of policies is going on?
Industry estimates of $40 Billion of face value maturities for 2007, and this is expected to increase several fold in the next several years

How much does a policy cost?
Price is determined by the life expectancy, annual premiums and face value

Who determines life expectancy?
Specialized actuarial firms certify life expectancy after reviewing medical records and lifestyle of insured

Who pays the premiums?
Investors will pay the premiums through an industry specialized escrow managed by specialized law administration firms for the time they hold the policy

How easily can the policy be resold?
A large and vibrant secondary market has developed creating guaranteed liquidity for investors

How secure is this?
This is an investment grade security underwritten by an “A” + insurance company. It is considered better than “AAA” Bonds

Why is it so secure?
Certainty of a payment event
Certainty of a payment amount
Certainty of a payment source

Why haven’t I heard about this?
Institutional investors have kept it under the radar; Time Magazine, Wall Street Journal and The Economist have in the last several years increasingly written major articles about the growth and nature of the industry

How does one make a purchase?
Lionheart has built strong relationships and formed contractual arrangements with specialized expert policy aggregators and can customize a portfolio to meet a specific need, large or small

View Wharton Business School Financial Institutions Study On "Benefits Of A Secondary Market For Life Insurance Policies" (PDF)

View Lehman Brother Report on "The Secondary Market For Life Insurance" (PDF)