THE EMERGING LIFE SETTLEMENT MARKET

 

Introduction

 

Over 15 years ago, a new asset class was born and institutions such as Credit Suisse AG, Deutsch Bank, Fortress Investment Group, hedge funds, pension funds, non-U.S. mutual funds, etc. have since been investing in this innovative and proven asset class. Though the general public knows very little about its development, this industry has grown to $10 billion and is projected by respected analysts to reach $150 billion within the next decade. According to a Wharton Study in 2009 , this secondary market in life insurance policies was projected by Conning Research to reach between $90 billion and $140 billion by 2016 from $12 billion in 2007 and from almost $0 in 2001.  California residents can can now take advantage of this unique program and its proven returns which until recently, only the institutional investors have enjoyed.  This asset class is known as Life Settlements.  The small investors can participate in this asset class via fractional life settlements which is based on the idea that senior citizens who no longer want to keep or pay for their life insurance policies, can sell such policies to multiple investors which purchases fractional interests in them.  In turn, the senior receives much more than the surrender value that the issuing insurance company would give them.

 

For example, assume Mr. Smith who is 80 years old and in very poor health has a $1,000,000 life insurance policy with a surrender value of $100,000. He also still pays an annual premium of $25,000 and has decided that he wants to use the policy to help pay for his current medical expense and relieve himself of the $25,000 annual premium.  If he surrenders the policy back to the insurance company, he will receive $100,000.  However, Mr. Smith may receive up to $400,000 by selling his policy through the established Life Settlements secondary market.  By doing so, Mr. Smith receives up to FOUR times more money for the same policy.  Investors then participates in the difference between the $1,000,000 face amount upon policy maturity after subtracting the cost of the $400,000 plus the annual premiums paid during Mr. Smith's remaining life expectancy.  The Life Settlements secondary market provides seniors like Mr. Smith the ability to gain far more than the insurance company would give should he surrender the policy and investors provide that service while participating in the eventual payout of the policy.