A financial transaction wherein the owner of a life insurance policy vends a superfluous policy to a third party for more than its cash value and less than its face value is known as life settlement. Sometime back it had been seen that if ever a policy owner opted out by surrendering the policy or allowing it to lapse, the additional value often abandoned back to the issuing life insurance company. Also, in some of the cases it was found that the insured’s health may have declined since the policy was issued and the policy may be worth considerably more than the surrender value. So the only alternative to this lapse is life settlement or even when the owner of a life insurance policy no more wants the policy, the policy is not performing up to the required level or can no longer afford to pay the premiums.
In a life settlement transaction, the one who are responsible for paying the client a cash sum greater than the policy’s cash surrender value are referred to as the life settlement providers. Some of the top providers in the industry are seen to fund several transactions each year and hold the seller’s policy as a very confidential and private portfolio asset. There providers are believed to be in direct work relation with the advisors for the development of transactions that are customized to a client’s particular situation. They too are said to be immensely experienced in the analysis and valuation of large-face-amount policies.
Being backed by institutional funds, they are said to be in-house compliance departments to cautiously review the transactions being carried out.
All the financial advisors who do not wish to submit cases directly to a settlement provider may sometimes work through a life settlement broker. These life settlement brokers act as intermediaries who are said to arrange between the policy owners wishing to sell a policy and the providers wanting to purchase them. And these brokers in place of money or fee shop a policy to multiple providers, much as a real estate broker solicits multiple offers for one’s home.
However, not all the brokers are the same and hence a life settlement broker will make sure that the cases are sold to reputable buyers who have chances to close without significant difficulties. It is, however, quite impossible for a financial advisor to achieve the highest possible price without going through an experienced life settlement broker.
Investors /risk takers
Since the life settlement investors provide capital or financing for life settlement transactions, they are, therefore, often termed as financing entities. These investors have a choice; while some make use of their own capital to buy policies, others raise the capital from a wide range of investors through a variety of structures.
The entity which enters into the transaction with the policy owner and pays back when the life settlement transaction closes is known as a life settlement provider.
It has been seen that often the life settlement provider has a written agreement with the life settlement investor to offer the life settlement provider with the funds required to acquire the policy.
He is hence the ultimate funder of the secondary market transaction during such circumstances.
Life Expectancy Providers
The specialized independent companies which are said to issue life expectancy reports (LERs) that estimate the life expectancy (LE) of an individual are referred to as the Life Expectancy Providers (LEPs).
Life expectancies are the average survival time amongst a particular risk cohort and not the forecast of how long an individual will live. The risk allies are typically grouped by age, gender, smoking, and relative health/morbidity.
Based on various debits/credits for various morbidity characteristics very similar to the medical underwriting which is performed by life insurance company underwriters and reinsurance underwriters, the LEPs are actually made up of actuaries and medical underwriters who are said to be utilizing the actuarial models.
The 2001 Valuation Basic Table (VBT) published by the Society of Actuaries is said to be the most commonly used mortality table. This table is said to be based on the data supplied by contributing life insurance carriers.
A new table had, however, been published by the Society of Actuaries in the year 2008, which was based on 695,000 lives representing $7.4 trillion in death benefits, which is said to be almost 3 times more lives than the former 2001 VBT.
The history of life settlement
The secondary market for life insurance is said to have been in making for more than 100 years. It is said that had there not been a number of events, judicial rulings, and key individuals, this life settlement market, which is relatively low at present, would not have originated.
The Policy as Transferable Property
The Supreme Court case of Grigsby v. Russell (1911) is said to have established the policy owner’s right to transfer an insurance policy. Life insurance possesses all the ordinary characteristics of property, and therefore represents an asset that a policy owner could transfer without limitation, said Justice Oliver Wendell Holmes.
Holmes wrote, “Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.”
It is said to have placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. At the discretion of the policy owner, a life policy can be transferred to another person for all the other types of property.
In the year 2001, the National Association of Insurance Commissioners (NAIC) is said to have taken a very significant step by releasing the Viatical Settlements Model Act defining guidelines for avoiding fraud and ensuring sound business practices.
It was during this time when some of the settlement providers that are prominent today started to acquire policies for their investment portfolio using institutional capital. Also, the entrance of well-funded corporate entities is said to have transformed the settlement concept into a regulated wealth management tool for high-net-worth policy owners who do not need a given policy.