What is a life settlement?

In 1911, the US Supreme Court deemed that the ownership in a life insurance policy by a US citizen was personal property, so that US citizens can sell their ownership interest in a life insurance policy, just like you can sell a car or a plane.

A life settlement is the transfer of ownership and beneficiary rights of a life insurance policy in exchange for a cash settlement. The Supreme Court ruling essentially makes insurance policies an asset that policyholders can encash before their demise. There can be a number of reasons for a policy owner may want to sell their policy, however, but mostly it's based on the fact that they no longer need or can afford to keep paying premiums. In a win-win situation of a sale, the policyholder is relieved of servicing the premiums and gets cash up-front, and investors get to invest in this unique asset class.

This secondary market in US life insurance policies offers investors the opportunity to purchase life insurance policies at a discount to face value. The main benefits are straightforward:

• The asset is not correlated to the financial markets
• It has minimal volatility and returns are more stable
• The industry is highly regulated at the state level
• Low credit risk on the underlying assets, as life policies are generally issued by life insurance companies rated investment-grade

Since 2009, the industry has also developed a tertiary market in life insurance, in which investors can trade blocks of life settlements amongst each other. As volume increases in these transactions, so does the liquidity profile of the asset class and attractiveness to large institutional investors.

Today, over $30bn of life settlements are in force, and the market records over $10bn in transactions annually with a significant potential for further growth.

Investing in life settlement funds

Most private life settlement funds target a return of 5 - 10 % annually, higher than other fixed-income products.

The main risk in this niche market would be longevity risk, where the insured person lives beyond the life expectancy calculated by the actuaries.

Given that fixed-income yields will likely stay suppressed, life settlement returns and its low volatility profile makes this an attractive asset class for our investors.

24 Oct 2020