Take a closer look at life settlements

Transcription

1 Take a closer look at life settlements Transform your client s investment For financial intermediaries & professional investors

2 Contents What are life settlements? 1 How do life settlements work? 2 Why would someone sell their policy? 3 Is it ethical to profit from someone s mortality? 4 Are policy sellers getting a good deal? 5 What are regulators attitudes to life settlements? 6 Aren t they only suitable for High Net Worth Clients? 7 How can I find out more? 8

3 What are life settlements? Life settlements, sometimes referred to as senior [life] settlements, involve the purchase of life insurance policies from [US] individuals, typically age 65 and older, who have various ailments or suffer from a particular disease and whose projected life expectancy is typically between two and 10 years. Standard & Poors When a policy owner sells their life insurance policy to a third party or investor for more than its cash surrender value, it's called a life settlement. This third party or investor must then take on the premium payments as it is the buyer, or end investor, who becomes the new beneficiary when the policy matures for a higher amount than they paid for the policy. It s a rather simple investment concept but one which has thrown up a healthy debate. Why? Because it s a new market, it involves longevity risk and is set to grow significantly due to its investment appeal. So what is all the hype about? As a financial adviser or professional investor you will have seen many investments come on to the market sparking lively debate before becoming accepted into the mainstream. It s also human nature to simplify issues, make them black and white in order to make the decision making process feel more comfortable. But for those who choose to look a bit closer and separate the emotional from the rational, there can be huge rewards. This booklet aims to dispel some of the myths surrounding life settlements to help you make an informed decision as to the benefits of the asset class and its suitability for your clients. Life Settlements Explained 1

4 How do life settlements work? We believe the life settlements asset class has potential to offer an attractive return stream uncorrelated to capital markets. Mercer, a leading global provider of consulting, outsourcing and investment services, report on Insurance Linked Strategies: Life Settlements. April Life Settlements, in general terms, represent a secondary market for US life insurance policies. The owner of the life insurance policy sells it to a third party investor for a cash payment, instead of allowing the policy to lapse or surrendering it to the US insurance company for a lower cash value. This typically involves purchasing the policies of elderly (normally 65 years or older) individuals, often called Senior Life Settlements. The seller of the policy receives a one-off cash payment from the third party investor. This is typically substantially higher than the surrender value of the policy offered by the insurance company. The third party investor then becomes the insurance policy owner, and beneficiary, and is responsible for the payment of all future premiums. On the death of the insured, the beneficiary receives the maturity value or death benefit. But why would someone want to sell their policy? Life Settlements Explained 2

5 Why would someone sell their policy? The Senior Life Settlements are purchased from someone 65 or older whose health has become impaired due to advanced age. They are generally not, as some would believe, terminally ill as in the case with viatical life settlements in the 1980 s. The Facts: Sale at an advanced age An elderly person who is not terminally ill can choose to sell their policy for many reasons: The premium payments have become too expensive as they are living from their retirement income. A policy purchased to protect an estate from death taxes is no longer needed because the value of the estate has dwindled. A policy purchased to protect the spouse is now unnecessary due to divorce. The insured wishes to exchange the policy payments for long term care insurance or an annuity income. The Facts: Sale due to impaired health A medical illness can be a financial, as well as a psychological blow, in which the high cost of care can rapidly deplete a persons savings. This can even impact on their ability to pay the premiums on the policy, meaning that the policy could lapse and the family receives nothing despite premiums being paid for years. There would appear to be no particular ethical issues from investing in this asset class, provided that products and processes are fully transparent to all parties. CASS, one of the UK s top business schools, report on Life Settlements & the Ethics of Profiting From Mortality July Life Settlements Explained 3

6 Is it ethical to profit from someone s mortality? Anyone living off an annuity has a similar moral position. So, if we're going to brand life settlements unethical, we should have a close look at our own portfolios first. The Motley Fool, a leading UK financial website. A return to Die For. February Longevity, as an asset class, has been around for a long time. In fact mortality projections have and still do play a critical feature in a wide range of financial products from life insurance to defined benefit pension plans, and even individual and bulk annuities. In fact when you look at it from a purely investment perspective, life settlements simply boil down to managing risk in this case mortality risk. The advantages of investing in longevity For those investors who are looking to diversify their portfolio, and are prepared to invest for the long term, life settlements have some distinct advantages: Returns generated have no correlation to traditional asset classes and markets. Exhibit low volatility. Potential for strong returns. Given the turbulence in the markets, and the uncertainty as to where long term performance will come from, life settlements are becoming increasingly popular with more sophisticated financial advisers and their clients. Life Settlements Explained 4

7 Are policy sellers getting a good deal? For the reasons mentioned earlier the policyholder decides that they want to release the cash from their policy. On the one hand they have the option to accept the cash surrender value offered by their insurance company, and on the other, they can sell it on the secondary market for a potentially higher amount. Given the fact that a significant number of policyholders don t realise that they can sell their policy on the secondary market, many will accept the cash surrender value. The advantages of selling a policy Looking at a realistic example we can see that a policy that would pay out $1,000,000 on death, could have a cash surrender value of $43,000. Instead they could sell their policy on the secondary market for $220,000. In fact in a separate study by CASS Business School and the Pensions Institute entitled: Life Settlements & the Ethics of Profiting From Mortality July 2009, it was even reported that: The ability to sell unwanted policies at a later date might encourage people to take out life insurance in the first place. We have demonstrated that a competitive secondary market for life insurance policies improves the welfare of both new and existing policyholders. N Doherty and H Singer, The Benefits of a Secondary Market for Life Insurance Policies. Wharton School, October Life Settlements Explained 5

8 What are regulators attitudes to life settlements? Treating customers fairly requires firms involved in the distribution of [life settlements] to consider fully the impact on the end user, the consumer purchasing the product. Peter Smith (FSA), speaking at the European Life Settlement Association, London, February The UK regulator has rightly touched on areas where it feels life settlement providers should be clearer when marketing these products. We welcome greater scrutiny and regulation, as it aids better understanding and appreciation of the risks and rewards. Hasn t the FSA said these products are complex? They can be, but so can any investment product. It s just a matter of how they are structured. However the asset class is simple. With our Cascade Portfolio clients buy beneficial rights in a portfolio of life settlements, so they know at the outset what the maturity value will be. When they mature they can re-invest in more policies or withdraw their cash. Aren t life settlement funds opaque at best? Yes, but that s the nature of a life settlement fund. The Cascade Portfolio however lets clients see what they are investing in, as they own the beneficial rights to each policy. They ll even get a certificate of ownership detailing the policy. Why do some providers pay high commission? We believe our commission structure is fair for the role you will play in this long term investment. However the Cascade Portfolio has been designed to enable you to rebate the commission back to your clients in the form of an additional allocation. Life Settlements Explained 6

9 Aren t they only suitable for High Net Worth Clients? Life settlements are suitable for experienced investors who are looking to invest for the long term as part of a diversified portfolio. Whilst you might think that life settlements are only suitable for High Net Worth clients, they could also be suitable for clients who are looking to diversify their pension investment portfolio. Transform their retirement plans For those clients currently investing in a pension (ie Self Invested Personal Pension (SIPP) or Qualifying Recognised Overseas Pension Schemes (QROPS), life settlements could be a way to maximise their retirement plans. Clients looking to maximise their pension plans in the run up to retirement can be assured that the returns from life settlements have no correlation to other asset classes. This could be particularly relevant for those clients who have been impacted by the volatility in equity markets recently. Life settlements are truly noncorrelated to the traditional instruments that pension schemes invest in. Eamonn Ling, Head of Investment at Catalyst Investment Group. A degree of certainty For those clients who are wary of equity volatility, but are concerned about the returns from fixed income and cash, life settlements could also be a good way to diversify their portfolio into an asset that has a known maturity value in the future. Life Settlements Explained 7

10 How can I find out more information? Providers have a duty to help the distributor sell the product and achieve good customer outcomes. Peter Smith (FSA), speaking at the European Life Settlement Association, London, February Today, advisers are being asked to consider alternative investments as part of their independent advice process. However we appreciate the time you have to invest in order to keep up to date with these new and exciting products. Therefore we ve listed some sources of information you might like to take a look at to enhance your understanding of life settlements. Simply type the address into your browser to view the link. And Death Shall Have No Dominion: This Pensions Institute report explains how the life settlement market works and considers the ethical issues raised. Final_3July08.pdf A Return To Die For: The finance website Motley Fool s take on life settlements. a-return-to-die-for.aspx Insurance Linked Strategies, Life Settlements: Mercer Consulting s report looks at why investors should investigate the use of longevity-linked investments such as life settlements. For more information on investing in life settlements via PDL International, please call us on or visit our website at Life Settlements Explained 8

11 The small print The information and opinions contained in this brochure are being supplied for information purposes only and not for any other purpose, and should not be treated as financial advice, legal advice or tax advice. PDL International accepts no responsibility in respect of statements of third parties that are quoted in this brochure. Contact us PDL International T.I.S. House Spring Villa Park Edgware Middlesex HA8 7EG United Kingdom T: +44 (0) E: PDL International is a trading name of Absolute Assigned Policies Limited. Absolute Assigned Policies Limited is a company registered in England and Wales (company registration number ) and is authorised and regulated by the Financial Services Authority. Absolute Assigned Policies Limited s registered office is at TIS House, Spring Villa Park, Edgware, Middlesex HA8 7EG, United Kingdom. Absolute Assigned Policies Limited s VAT number is PDL/372_04/0710