For Investors. Life Settlements Explained

Transcription

1 Life Settlements Explained For Investors

2 Life Settlements Explained Concept 5 Historical Overview 6 Facts & Figures 8 Policy Value 10 Additional Resources 11 3

3 5Top 5 Reasons Policy Owners Sell Their Life Insurance Policy Insured Many policy owners buy these life insurance policies to guarantee the financial stability of their family and/ or loved ones while they are younger and financially dependent. As these beneficiaries age and become more financially independent, the need for the policy ceases. Or, in less fortunate cases, these beneficiaries predecease the owner, making the policy unnecessary. unaffordable Premium payments At times, holding on to a life insurance policy can become unaffordable due to premium payments. The rising cost of health care and reduced retirement income has forced some senior citizens to reevaluate their budgets and look for new ways to fund their golden years. Selling their life insurance policy has become a popular option to help boost their retirement fund and cut expenses by eliminating premium payments. estate planning needs In the United States, life insurance policies are often purchased for estate planning needs. They play an important role as part of family trusts established for wealth transfer to younger generations. Due to taxation rules, these needs can change, inadvertently making the purchased policy inadequate. Selling the policy in the secondary market can help recover the cost of purchasing and servicing the policy. Often, the estate trust makes a profit in the sale of the policy. financial circumstances A substantial financial gain or adversely, a severe decrease in income, may make owning certain policies unsustainable. LIFE EVENT Life s course is ever changing and evolving. It s important to be flexible should a major life event such as a divorce or a sale of a business occurs. These life events trigger a full reevaluation of one s finances and insurance needs. 4

4 LIFE SETTLEMENTS EXPLAINED Concept Life Insurance Policy A Valuable Asset In the United States, a life insurance policy is a valuable asset. It provides benefits beyond the insured s lifetime. However, benefit can be also be realized during the insured s lifetime. Like a house, an automobile or any asset that is personal property, life insurance can be sold. The sale of a life insurance policy is called a life settlement. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement, the policy owner transfers ownership of the policy in exchange for an immediate cash benefit or, in some instances, a reduced interest in the death benefit for the policy s beneficiaries. 5

5 LIFE SETTLEMENTS EXPLAINED Historical Overview Grigsby v. Russell The U.S. Supreme Court rules that life insurance policies are an asset. Like all assets, policies are freely assignable for value. For decades after 1911, life insurance policies were informally traded Today 41 states and the territory of Puerto Rico contain comprehensive life settlements regulation, as well as 4 additional states that regulate viatical settlements. In addition, 7 states contain mandated disclosure by insurance companies to consumers noting their options to lapse or surrender 1994 Recognizing the need for industry regulation and professional standards, the Life Insurance Settlement Association (LISA) is formed to promote the development, integrity and reputation of the industry. Prior to LISA s formation, only 3 states contained regulation of viatical settlements Lexington Settlements Ltd. was conceived The National Council of Insurance Legislators (NCOIL) adopted its first version of the Life Settlements Model Act. 6

6 The National Association of Insurance Commissioners (NAIC) Viatical Settlements Model Act first adopted in 1993 has been amended extensively. Most importantly, it expanded the definition of viator (owner) to include all policy Lexington Settlements begin operations Since 2008, over 30 new laws have been passed to strengthen consumer s rights and create a more sound and transparent regulatory structure for market participants In November 2010, NCOIL adopted its Life Insurance Consumer Disclosure Model Act. This Act mandates that insurers provide written notice to senior policy owners who are facing the lapse or surrender of their policies. This written notice must clearly state that seniors have options regarding such lapse or surrender, one of which is a life settlement. sellers regardless of their health status. Within a year of passage of both the NAIC Model and the National Conference of Insurance Legislators Model, over a dozen states would pass laws regulating life settlements In 2007, both NCOIL and NAIC revised their Model Acts extensively. Looking forward, NCOIL s Life Settlements Model Act and the NAIC s Viatical Settlements Model Act remain the most popular current forms of regulation nationwide The U.S. Government Accountability Office (GAO) and the U.S. Securities and Exchange Commission (SEC) both released large studies of the Life Settlement Industry recognizing the growth of the life settlement market and, importantly, that life settlements are a valuable alternative to the lapse or surrender of a life insurance policy for American consumers. 7

7 LIFE SETTLEMENTS EXPLAINED Facts & Figures Life Settlement Fund Index FTSE U.S. Gov. Bond Index HFRI Fund Weighted Composite Index DJ U.S. Corp. Bond Index S&P Case Shiller Home Price Index The proof is in the numbers It s undeniable life settlement is beneficial for investors and consumers alike. Solely based on longevity risk, life settlements is uncorrelated to the performance of financial markets. Life settlement investments were unaffected by the great financial market meltdown of It has proven to be a lucrative and effective diversification option for investors. S&P Life Settlements in comparison to other asset classes (11/ /2009) Financial Market Crash (University of St. Gallen research) MAR 2003 NOV 2003 NOV 2004 NOV 2005 NOV 2006 NOV 2007 NOV 2008 NOV

8 Over $5.62 billion paid over cash surrender value $5.62 BILLION For consumers, life settlements consistently offers a more lucrative exit strategy to unwanted or unneeded life insurance policies. According to a 2010 US GAO study, US policy owners received $5.62 billion more than the policy cash surrender values from life settlements from Today, the industry is highly regulated, provides tremendous value for consumers and investors, and employs a sophisticated workforce of thousands of people. 9 9

9 LIFE SETTLEMENTS EXPLAINED Policy Value DEATH BENEFIT LIFE EXPECTANCY MONTHLY COST OF PREMIUMS POLICY MARKET VALUE A life insurance policy is one of the most valuable assets many Americans will ever own. However, prior to the life insurance secondary market there was only one potential purchaser for a life insurance policy, the issuing insurance company. Under that circumstance, most policy owners found that the only possible offer was the policy s cash surrender value which often was far below the policy s market value. The secondary market for life insurance creates liquidity for policies. For insureds 70 and older, this market s liquidity and other factors may generate values for a large percentage of life policies significantly greater than the cash surrender value. On average, policy sellers receive 4-7 times the amount of the policy s cash surrender value. Market Value Policies with market value for a life settlements are typically from policy owners 70 or older with a life policy having a face amount in excess $100,000. A settlement is only possible when the policy s market value exceeds the cash surrender value. The key factors determining the market value of a policy are the death benefit, cost of expected premiums, and the life expectancy of the insured. Frequently, the underwriting is the key driver in determining the market value. In simple terms: the lower the premium and the shorter the life expectancy underwriting, the higher the market value. 10

10 Additional Resources For more information on Life Settlements, including articles and questions and answers, we invite you to visit our website In addition, we invite you to visit the Life Insurance Settlement Association website at: The information provided in this brochure was contributed in part by the Life Insurance Settlement Association Established in 1994, the Life Insurance Settlement Association is the oldest and largest trade organization in the life settlement market. Its goal is to advance the highest standards of conduct for market participants and to promote education and awareness to consumers, investors, and public officials. LISA represents more than 100 member firms including 2500 professionals from life settlement brokers, life settlement providers, institutional investors, life settlement servicers, and other service providers

11 A proud voting member of the This product is not available to citizens or residents of the United States or Canada. ls.exp_rev.08/13-en Lexington Settlements Canons Court, 22 Victoria St. Hamilton HM-Ex, Bermuda Phone: (441) Fax: (441)