What is a Life Settlement?
A Life Settlement is a United States issued life insurance policy that has been sold before its maturity to generate a cash sum for the policy seller and enabling the original owner to enjoy some of the cash benefits during their lifetime. The life assured is typically over the age of sixty-five and a life expectancy estimate can therefore be obtained with reasonable accuracy using population mortality statistics and evidence of the assured’s personal health profile.
How does it Work?
Why are Policies Sold?
There are several good reasons, including:
- The policy is no longer needed
- Policy owner or a family member needs money now
- Premiums are too costly
The Fund’s Valuation Agent is an independent firm that provides a monthly actuarial valuation of the Fund’s assets, which aims to gradually unwind the difference between the purchase price and the maturity value, less premiums and other operating expenses. Valuations are produced using a specialist actuarial software called Model Actuarial Pricing Systems (or MAPS), which is considered to be the industry standard. The investment management team monitor pricing very closely to ensure that the Fund is valued in accordance with prevailing market conditions by identifying the typical discount rate (or internal rates of return or IRR that policies are being traded at) and applies this discount rate to the portfolio valuation to achieve a Fair Market Value.
The anticipated period that policy will be held by the Fund before maturity is linked to Life Expectancy (LE) estimates which are obtained from specialist medical underwriting firms that make actuarial underwriting assumptions by combining population mortality data with the medical and lifestyle history of the life assured to calculate the LE. The LE and forecasted future premiums are combined to calculate a purchase price for the policy and will also be used each month by the Fund’s Valuation Agent to identify Fair Market Value for each policy until such time as it matures and a fixed maturity pay-out is issued by the insurance company to the Fund, generating an absolute return.
The risk for the buyer is that the policy will only pay out on death of the life assured and whilst medical underwriting techniques afford a great deal of accuracy; a Life Expectancy estimate (or LE) is simply a guideline and any inaccuracy may potentially lead to holding the asset for a longer or shorter period of time. If a policy is held for longer period of time than originally expected then more premiums will be paid and the annualised gain will reduce. Conversely if a policy matures earlier than expected then the gains will be greater than expected. Diversification is therefore an important component to the management of the asset class, which will ideally be achieved by spreading the risk across a wide range of insurance companies and lives assured.