This article makes the case that life settlements are a strong form of socially responsible investment. In the past investors such as family offices, RIAs, and institutions have been attracted to the asset class due to its history of uncorrelated, strong returns. Interest has increased even further as they have learned more about how life settlement investments positively impact society.
Here we explain why that is the case and encourage those unfamiliar with the asset class to take a closer look.
Definition and First Impressions
A life settlement is the transfer of ownership and beneficiary rights of an unwanted and/or unneeded life insurance policy in exchange for a cash payment. The seller of the policy generally no longer has the responsibility of paying future premiums – those are transferred to the investor. In exchange, the investor profits from the difference between the death benefit of the policy and acquisition, additional premium payments, and administrative costs.
Most often, people who are learning about life settlements for the first time focus on that last part: the investor benefits when someone passes away. It can seem a bit morbid to some people. But for a moment, let’s instead focus on the time the policy is sold: who benefits then? The answer is the seller, of course. A deeper dive into the situations faced by many of these sellers, and how life settlements provide them with a solution they otherwise wouldn’t have had, helps to change the conversation.
Crises Facing Seniors Today
Sellers in the life settlement market are typically 70 years of age or older. As such, they are often facing one or more of the following societal crises:
Inadequate retirement savings
A need for expensive, long-term medical care
Poor alternatives for unwanted or unneeded life insurance policies
Crisis #1: The Retirement Deficit
It likely comes as no surprise to most people that U.S. seniors are not saving enough for their retirement. There are myriad statistics proving that point, but one eye-opening example comes from Fidelity Investments. They recommend people hold a minimum of 8x their annual salary in savings to use as income during retirement. Currently, about 80% of Americans have retirement savings of less than 1x their annual salary, and over 40% of Americans have no retirement savings whatsoever. Altogether, U.S. working households are a whopping $11.6 trillion short of Fidelity’s savings target. This means there are a lot of seniors searching for ways to reduce costs and/or increase income.
Source: The Retirement Savings Crisis: Is It Worse Than We Think? By Nari Rhee, PhD June 2013
Crisis #2: Long-Term Care Costs
Long-term care includes a broad range of services that help with the basic activities of everyday living such as in-home care, assisted living, and nursing homes. As life expectancies have increased, larger numbers of seniors have experienced a need for such extended care. Spending on long-term care is expected to more than double from 1.3% of GDP to 3% by 2050 as demand and costs increase. The situation is exacerbated by the fact that Medicare does not cover long-term services such as these. It is no surprise then that medical costs are cited as the most frequent cause of personal bankruptcy for U.S. seniors.
Crisis #3: Life Insurance Options
Today, when an insured no longer wants or needs their life insurance policy, the insurance provider offers two options:
stop paying premiums and allow the policy to lapse for no return, or
surrender the policy back to the carrier for the “cash surrender value”
Both options allow insurance carriers to pocket billions of dollars in pure profits at the expense of individuals who have oftentimes been paying premiums on those policies for decades. Since 2008, life insurance policies with a combined face value of approximately $2.5 trillion dollars have been terminated prematurely. This is often because insurance premiums increase significantly later in life and become a financial burden, and because the insured isn’t aware of any other options.
Solution: Grow the Life Settlements Market to Promote Senior Financial Independence
Life settlements provide the sellers in our original transaction with a more generous option for disposing of their life insurance. Life settlements on average pay 7-8x the cash surrender value of a policy, and they also offer more flexibility wherein – for example – the seller can still maintain a portion of the death benefit while reducing or eliminating their premium costs. Combined, these factors result in an incredible relief in the lives of individuals struggling to survive under the weight of their medical bills and retirement expenses.
By shifting our focus towards the sellers of the policies and their motivation for doing so, it becomes clear that the existence of the life settlement market provides a societal benefit beyond what is offered by insurance carriers. Regulators across the country clearly agree, as evidenced by the fact that:
all but 4 states regulate life settlements to some degree
some states are now requiring that insurance companies notify lapsing policyholders that life settlements are an option available to them
Congress has proposed HR 5958 to allow proceeds from life insurance sales to be used tax-free for health care costs
Given this background, family offices, RIAs, institutions, and more should consider how an investment in the market for life settlements helps to alleviate the economic distress on our senior population and provides financial independence to pay for retirement, medical bills, and long-term care.
Special Thanks to our Contributor
AIR Asset Management
AIR Asset Management advises and manages investment vehicles that provide unique opportunities within the alternative investment space to qualified investors. Our focus is on life settlements and other longevity-linked investment products.