1) What is a senior life settlement?
Senior life settlements is the standard industry term used to describe a US life insurance policy traded on the secondary market. This is a life insurance policy belonging to a US citizen over the age of 65, with a life expectancy of less than 15 years.
A third party buys an unwanted policy at a significant cash discount to its maturity value and maintains the annual premium payments until the death of the policyholder. On the maturity of the policy, the third party receives the payment from the life assurer.
2) Is this macabre? Why would someone want to sell their life insurance policy?
Evidence has shown that the emergence of the secondary market for life insurance is providing much greater financial freedom to sellers looking to boost their income today and investors seeking to generate their income of tomorrow.
The advantage for the seller of the insurance policy is receiving an attractive cash lump sum today, where they would otherwise let an unwanted policy lapse or receive a nominal sum by surrendering it back to their insurer.
3) Why are investors interested in life settlements?
For investors, access to products backed by these unwanted life insurance policies gives them a unique opportunity to invest in an asset that has no correlation with traditional investment classes such as equities, bonds, or property. Since the policy will necessarily pay out on the death of the original policyholder, the question of a positive return is not a case of ‘if’ but ‘when’. Investors also have the comfort of knowing that enabling policysellers to sell their policies for a better sum than returning it to their insurer means they too stand to benefit from the trade.
4) How secure is investing in life settlements?
The secondary life insurance market is nearly 20 years old, with techniques for modelling the rate at which insurance contracts increasing in sophistication, so as to allow portfolios to be built up that deliver more predictable investment returns.
Understandably, life settlements are gaining the attention of investors looking to smooth portfolio volatility and achieve genuine diversification from market risk. They present an excellent bolt-on to an existing portfolio compromising more traditional investments. For retail investors, assessing whether life settlements are suitable for you is best explored with your financial adviser.
Returns from senior life settlements depend upon the accurate estimation of life expectancy and solvency of the underlying insurance company. The cost of senior life settlements depends upon the availability of policies, the level and length of premium payments and many other factors.
