In a “life settlement” transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is less than the death benefit on the policy, but more than its cash surrender value. The investor (which may be an individual, a private equity fund, or an institution) then maintains the policy, pays any additional policy costs or premiums, and collects the death benefit when the insured passes.
The primary reasons a policy owner are; they can no longer afford the ongoing premiums, they no longer need or want the policy, to help fund long-term care, pay for increased medical costs, or they need money for other expenses. On average, the policy owner receives three to five times more than the surrender value for the policy. In a retained death benefit transaction (RDB), policy owners receive cash payments and their beneficiaries also receive a payment after the insured dies.
Life settlements remain a niche asset class. For the year ending 2020, according to the Life Settlement Report by the Deal, there were 3,241 policies purchased with an estimated purchase price of $4.6B on the secondary market (from the original policy owner). This was up from 2019 when 2,878 policies for a total value of $4.4B were purchased in the secondary market. In contrast, as of 2018, there were 267M life insurance policies in force in the United States. Moreover, it is estimated that roughly 10M policies a year lapse. Since the policy owner would always be better off selling rather than lapsing, many believe the life settlement market has tremendous growth potential.
Life Settlement Polices are slowly becoming a main stream investment. More institutional investors are funding life settlements and have invested billions of dollars in assets since the early 2000s. For reference, in the primary market, insurance companies sell life insurance policies to individuals, who become policy owners. In the secondary market, policy owners' policies are sold to third parties such as life settlement providers, who purchase policies on behalf of third party investors such as institutional investors. In the tertiary market, third party investors trade policies, which are included in the asset class.
Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements. Even Warren Buffett invests in life settlements.
Policyowner - Party who owns the insurance policy
• Insured - Person(s) whose life is tied to the policy, which may be different from Insured
• Financial advisor - Advisor to the policy owner
• Life settlement broker - Company that shops policies to life settlement providers
• Life settlement provider - A company that is licensed by state insurance departments to purchase life insurance policies from policy owners
• Investor - Institutions that purchase pools of policies from life settlement providers
In a life settlement transaction, the insured completes an application. Then medicals will be pulled on the insured and sent to an Actuary, who will then determine a Life Expectancy. Once they receive a formal offer from a life settlement provider, the insured receives a “closing” package containing documents to formalize their acceptance of the life settlement exchange offer. The client signs transfer-of-ownership forms to complete the transaction. Once the policy is irrevocably transferred to the new owner, funds are release from Escrow to the seller. This process can take as little as 10 days and as much as 6 weeks.
Richmond Life Settlement will examine market prices according to the ‘fair value’ approach using closed life settlement transactions. Factors in evaluating include an evaluation of the insured’s health, life expectancy, the face amount of the policy and calculating the ROI of the policy to the buyer using those factors.
Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements. Even Warren Buffett invests in life settlements. And life settlement investments are poised for big growth in the coming years. According to a 2018 study by the investment management firm Conning, $200 billion in life insurance is set to be surrendered or lapse every year until 2027. Life settlements are not for everyone, but they are worth serious consideration if you are able to invest in them.
There are many reasons that someone may no longer need or want their life insurance policy. Some common reasons include:
• A spouse may have passed and other children/heirs are self-sufficient
• The insured may have divorced or have no heirs they wish to leave assets to
• Funds may be needed to pay for long-term care or healthcare costs
• Changes in estate or tax law may cause an individual to consider lapse or surrender of a policy
• The policy owner has fallen behind in payments, experienced a change in their personal finance, or wishes to halt remaining premium payments
• A desire for cash arises, whether to purchase a retirement home or fund a grandchild’s college tuition
For whatever reason, the current policy owner decides they would rather have a cash windfall than the insurance policy. They wish to trade their death benefit for a living benefit that they can use in their remaining years.
In a Supreme Court ruling dating back to 1911, Justice Oliver Wendell Holmes Jr. delivered the majority opinion that would lay the groundwork for life settlements. The ruling came in the case of Grigsby vs. Russell and established life insurance contracts as salable assets. R. L. Russell was the executor of John Burchard’s estate. Burchard had passed away about a year after an operation. However, in order to afford the operation, Burchard had sold his life insurance policy to Dr. Grigsby in exchange for the operation plus $100. When the insurance company paid Dr. Grigsby instead of the estate, Russell sued to have the proceeds paid to the estate. The case went all the way to the Supreme Court, and the court affirmed that Burchard had the legal right to sell his policy and Grigsby had the right to purchase it. The issue at the heart of Justice Holmes’ opinion is as such: “…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property…To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.” The practice of buying and selling policies became much more popular in the 80s with the rise of the HIV virus. “Viatical settlements,” as they became called, allowed a terminally ill policy owner to sell their life insurance policy for more than the cash surrender value. In the years since, life settlements, also known as “senior settlements,” became popular both with institutional investors and very elderly or unwell seniors who wished to sell their insurance policies. The financial instability experienced by many as a result of COVID-19 has likely led many individuals to seek settlements for their policies, either because they needed the cash to cover lost wages or other expenses, or because a loss of employment made it difficult to pay their premiums.
There are three basic ways that Life Settlement investments are bought and sold:
1 Direct Purchases of Life Insurance policies. This requires a large outlay of cash, along with the expertise to buy the right policies. For those wishing to invest a million dollars or more, this can be an option. It may also be the most efficient in terms of costs, however, life settlements require expert analysis and are NOT a “do-it-yourself” project.
2 Direct Fractional Life Settlements. With Direct Fractional life settlements, larger policies are divided up into smaller portions and sold individually to investors. Each investor owns a portion of the policy, or in many cases, several policies.
3 A Life Settlement Private Equity Fund. In this option, the investor is purchasing a portion of a fund comprised of hundreds of policies. One advantage to this is diversification. If an investor purchases only one or two policies (or direct fractional portions of policies), their return will be less predictable than what a fund can deliver.
A major disadvantage is that they are simply not available to most investors. Life Settlements are highly regulated, and at this writing, direct or direct fractional policies can only be sold to accredited investors. Accredited investors include individuals, banks, insurance companies, employee benefit plans, and trusts. For an individual to qualify, they must earn $200k per year ($300k joint income), or have a million dollars in net worth. The availability of certain life settlement investments also varies state-to-state. As of this writing, direct fractional life settlements are not available in most states.
Life settlements must be selected and managed correctly. While “do-it-yourself investors” can often do fairly well with something like peer-to-peer lending, life settlements are a sophisticated investment that requires expert selection, management, and oversight. For instance, there must be funds to maintain the policies or they will be canceled. And it is essential that the policies were originally purchased and later sold legally, or losses will be incurred.
In addition Richmond Life Settlement works with the top Licensed Funding and Underwriting Companies to insure that both the investor and the seller are protected.
Most financial advisors aren’t aware of true alternative investments. If they work for a brokerage firm, they typically have limited options as far as the types of investments they sell. Most advisors and brokers are not educated about nor allowed to sell outside of what their brokerage firm offers. Warren Buffett and Bill Gates have put Billions into Life Settlements… If you’re an Accredited Investor, life settlements may be worth looking into
We at Richmond Life Settlement can offer our clients a variety of options when it comes to purchasing Life Settlements.
1. We can facilitate an individuals purchase of one or an entire portfolio of policies depending on the investors goals and risk parameters.
2. We can help you build a pool for you and a group of individuals, company retirement plan, 401k, IRA, or Pension Plan.
3. We can place you in any number of Life Settlement Funds with either Fixed or Variable returns.
Richmond Life Settlement will be happy to provide you with a free consult and walk you through all your options when it come to Life Settlement. We can help you find policies that meet your investment criteria, guide you during the bidding process and will work with you till the transfer of the policy is complete. We then send you out a buyers binder with all your closing documents.
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2211 E Sample Rd, Ste 205
Lighthouse Point, FL 33064
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