Life Settlement Opportunities That Defies Volatility

An alternative strategy not tied to broader asset classes offers the predictability you may be seeking

Life settlements may not be a mainstream investment, even for investors accustomed to thinking outside the box. In today’s environment, more institutional investors have entered because the strategy offers low volatility and is uncorrelated to the stock and bond markets. As more institutional investors come into the market, sophistication, and liquidity are increasing.

The COVID-19 pandemic has profoundly disrupted the investment landscape worldwide. Institutions, Family Offices, and Financial Advisors seeking low volatility, uncorrelated investments, and typically double-digit returns should consider life settlements.

The Origin of Life Settlements

Life Settlements have a long history. In 1911, the U.S. Supreme Court ruled that a life insurance policy is in effect personal property. The ruling meant that the owner could sell the policy to a third party.

The Transaction Outlined

• In short, life settlement investments involve buying existing life insurance policies from policyholders seeking a cash payout greater than the cash surrender value of the policy (if any).
• In addition to the purchase cost of the policy, the fund pays all future premiums and becomes the beneficiary of the death benefit.
• The return on investment is realized when the insurance policy matures and the fund collects the death benefit- typically a gross internal rate of return (IRR) of 12%-15%.

How it Benefits Policy Holders

In the past, if a person could no longer afford to maintain their life insurance, or if their situation had changed and they no longer required it, there were only a few options. People could let the insurance lapse, thereby wasting all the previous payments, or they may have been able to sell it back to the insurer for a mere fraction of what it was worth at maturity.

Now, with an established secondary market for policies, owners can receive a realistic sum for their policy, enabling a significant social benefit for themselves and their families.

“People benefit, and the insurance companies do not.”

Current Observations on the Industry

• The market has grown steadily over the last 15 years.
• More institutional investors have entered, increasing competition for policies.
• There is now an active tertiary market where policies trade. The tertiary market is now more substantial than the secondary market and increasingly competitive.
• Conning Analytics forecast over the period through 2024, the average annual gross market potential for life settlements will be approximately $182 billion.
• The life settlements market is now fully regulated in 42 states.
• Traditional long lock-ups are being replaced with shorter investment durations.

Factors of Valuation of Life Settlements

Numerous factors go into determining how much an investment fund might have to pay for a life settlement. These include, but are not limited to:

• The death benefit (face value of the policy)
• The monthly or annual premium
• The age of the insured
• The medical condition of the insured

Another factor that can impact the return on a life settlement investment is through which the policy is acquired. Initial outlays can be significantly reduced by avoiding brokers in the tertiary market. The broker space is highly competitive, and bidding between competing investment firms inevitably escalates the prices of life policies.

The Importance of Policy Acquisition

Institutional investors in the life settlements market can typically only buy pools of policies, grouped in single tranches. This is due to their size and the amount of capital they have to put to work. Within that pool, some policies will be good, and some are less attractive. In this environment, the smaller, boutique manager can benefit significantly from the ability to source policies directly from the policyholder. Not only can they be more thorough in their selection process, but they also avoid acquiring the undesirable policies that are incorporated into pools of policies.

Underwriting and Valuation Process

Rates of Return and Investment Durations

A life settlement investment typically can generate a gross internal rate of return (IRR) of 12% to 15%. The most significant driver of returns in the past has been the collection of the death benefit, which meant that most investment funds were purchasing the more expensive policies that had only a few years left to run on the life expectancy. This strategy worked well initially when the market was relatively new and lacke