INVESTOR VIEW
Whereas life insurance companies consider historical costs vs premium receipts when calculating cash surrender values, life settlement investors value policies based on the death benefit of the policy and the future premiums payable to the life expectancy of the insured.
THE ECONOMIC RATIONALE
Maximizing Value
INVESTOR Buy & Sell Example:
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84-year-old male
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$4m Table E policy in 13th year
RATIONALE:
Purchase Price $288,500 (July 2021)
Premiums & Expenses $330,398
Total Cost $618,898
Sold $981,600 (August 2022)
IRR 68.72%
INVESTOR Buy & Hold Example:
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97-year-old male
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$5m Policy
RATIONALE:
Purchase Price $2,261,000 (July 2020)
Premiums & Expenses $1,466,940
Total Cost $3,727,940
Sold $5,035,760 (August 2022)
IRR 13.40%
PRIMARY RISK
FACTORS
Minimizing Risk
Longevity:
A sound understanding of longevity in the wealthy senior subsector of the US population is critical. Underestimation of longevity was the primary reason for underperformance of life settlement portfolios originated in the 2004-8 period.
Cost of insurance (COI) increase:
Insurance carriers can increase cost of insurance charges which can have a significant impact on policy performance. COI increases generally result in litigation which has reduced carriers’ appetite for making such increases.
Legal:
As life insurance / settlements are regulated at state level, a good understanding of each state’s legislation is essential. Legislation and case law has generally trended in favour of investors.
Liquidity:
Although there is a growing tertiary market, life settlements, by their nature, are a relatively illiquid asset class.
Headline:
Life settlements have attracted negative headlines in the past. However, increased regulation and understanding of the asset class have addressed many of the issues.