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The emergence of a robust secondary market for life insurance is a relatively recent phenomenon. The modern market arose in the late 1980s in response to the AIDS epidemic, as many young people were faced with the sudden need for money to pay for medical treatment and maintain their standard of living. These individuals sought liquidity from any long-term assets that they owned, including life insurance policies. The shortened life horizons of those living with AIDS meant that the actuarial values of their policies—that is the risk-adjusted value of the death benefit, taking into account future costs—had come to significantly exceed the policies’ surrender values.
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A life settlement is an insurance policy sold by the owner—typically the insured or a trust—for an amount greater than the surrender value of the policy but lower than the face amount of the policy. The purchaser of the life settlement becomes the new owner and beneficiary of the life insurance policy and is responsible for making future premium payments and collecting the death benefits of the insured. Exhibit 1 lists some of the reasons to sell an insurance policy.
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Life settlements provide producers with a very new way to help older life insurance clients make strategic use of their life policies. Even so, some marketers confuse life settlements with viatical settlements. It is true that both types of transactions entail the purchase of an existing life policy, with the proceeds of the sale going to the policy owner However, the two transactions differ in critically important ways.
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As the secondary market for life insurance surpasses a decade of steady expansion, the number of insurance and professional advisors engaging in life settlement transactions continues to multiply. In addition, we are seeing more wealth management firms, CPAs, and attorneys embracing the product due to its utility in the estate-planning process for high net-worth clients.
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Many of you may have heard about the secondary market for life insurance which is quickly becoming a primary investment opportunity. Although most of you have not entered the market yet, it is my prediction that within the next 3 years that at least 50% of all major hedge funds and family offices will have some involvement in the space. As a non-correlated asset class, generally independent of interest rates and the stock market, it is an investment with minimal gap risk.
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