Environmental, Social and Governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment.
Whilst, ESG investment has not yet reached mainstream status in some countries, it is fast becoming more than just a trend for many Australian investors, as noted during the AIMA Alternative Investment Conference-Australia. ESG criteria, when investing in alternatives, is considered an important aspect in risk and reputation management. A panel of institutional managers discussed how incorporating ESG, into investment decision-making, had a positive impact on their asset allocation strategies. These ESG strategies were predominantly investor driven. How does, investing in the life settlements market, support investors’ environmental, social and governance profile?
Is life settlements an ethical investment?
The life settlements asset is an example of ethically and socially responsible investing. Whilst the asset class yields attractive risk-adjusted returns the market itself developed out of necessity. The market for secondary life insurance policy exists, in the first instance, due to policy holders need to liquidate the asset.
It is important to remember that the US Life Settlement market exists because it corrects a market inefficiency. Grounded in the same financial modelling as life insurance, a secondary market has bloomed for life insurance policies holders where there was previously none.
This is recognised by governments of all persuasions, enacting supportive legislation and regulations for the secondary Life Insurance market in almost every State in the USA.
How did the life settlements market develop?
The secondary life settlements market is an improvement of the viaticals market in the 80’s. The sale of life policies grew in popularity in the 1980s when many people dying of AIDS used them to fund health care expense. It involved having a terminally ill person sell their life insurance policy to a third party to generate much-needed funds. Interestingly, this was the result of most US traditional life policies not having the critical illness claim benefits, most Australians are familiar with in their own life policies. Today, the sale of your USA life insurance policy doesn’t require you to be terminally ill.
How do life settlements benefit the insured?
The upside the insured selling their life insurance policy is considerable. As a collateral benefit, it has injected several billion dollars into the savings of US retirees and or their family structures.
In his detailed study, Empirical Investigation of Life Settlements Secondary Market for Life Insurance Policies, Narayan Naik, Professor of Finance, London Business School, shows that secondary life insurance market benefits both the investor and the insured selling their unwanted life policy.
Professor Naik, says: “The evidence suggests that the life settlement market has helped significantly in enhancing the welfare of policy-owners who, instead of surrendering, sold their life insurance policies in the secondary market”.1
In a study of 9,000 policies that were the subject of a life settlement between 2001 and 2011, policy owners received more than four times the cash surrender amount through a life settlement. Aside from the obvious benefits for the policy holder, the study also found that the expected internal rate of return for investors are consistently and significantly higher than treasury yields.1
There are numerous reasons Insurance policy holders may consider selling a life policy:
- The premiums are no longer affordable.
- The need to replace lost income in case of death of the insured no longer exists.
- A term policy may be reaching the end of the coverage period.
- Funds are wanted to improve a retirement lifestyle.
- The need for funds to pay estate taxes no longer applies.
- The need to eliminate future premiums payments.
- There is a need for resources to pay for health expenses and long-term care.
- A business no longer needs key-man insurance.
- Premiums of policies owned by trusts continue to rise.
Policy holder’s decision to sell is also reviewed with a number of other options such as;
- Keep the policy in-force through a loan or use of the cash surrender value.
- Seek an accelerated death benefit, if available.
- Reduce the death benefit with a lower face value and lesser premiums.
- Lapse or surrender the policy.
Buying a life insurance policy then becomes ethically acceptable. In the past, we have reviewed life settlements and concerns surrounding the ethical nature of investing in life insurance based securities.
Does regulation support the life settlements market?
A recent development in the USA, is a trend to use life policy sale proceeds, by mass market retirees. It funds long term care plans for the infirm pensioner, vulnerable to increasing healthcare costs. These involve smaller face value policies that had previously been less sought after by investors.
There have been numerous regulations encouraging the growth of the life settlements market. The regulations and supportive environment are making the sale of policies a compelling option for retirees whose health care needs have increased. Making this a legitimate and ethically responsible opportunity for both investor and policy holder. A win-win market. The two significant regulations, encouraging the growth of the market, have in fact been introduced in support of the policy holder.
- Further support of the Life Settlements industry was shown on June 14, 2013 when Texas lawmakers signed into law a bill that lets Texas state Medicaid officials tell policyholders applying for Medicaid assistance that they can sell their contracts to a life settlement company to cover custodial healthcare expenses.2
- Recently, the National Association of Insurance Commissioners (NAIC) has endorsed life settlements as one of many financial mechanisms for funding long-term care (LTC).3 This is a monumental movement in LISA’s awareness campaign for life settlements.
With similar bills pending for other states, time will tell what effect this will have on the profits of major life insurance companies. However, it brings a new mark of legitimacy to life settlements while helping those most in need pay for medical care.
What is the market outlook in the future?
The USA is no different to any other Western country, with an ageing population, typically underfunded for its retirement years. Life settlements are increasingly seen at least as a part solution.
- “ HealthView Services’ 2017 Retirement Health Care Costs Data Report shows retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future – almost triple the U.S. inflation rate from 2012-2016 (1.9%)1 and more than double annual projected Social Security cost-of-living adjustments (COLAs – 2.6%). As this Report details, the compounding impact of health care inflation means that health care costs will be one of the most significant expenses in retirement.” 4
- Life Insurance Settlement Association (LISA)states that, “there are 38 million life insurance policies owned by American seniors over the age of 65, which have a collective face value of more than $3 trillion ”5
- The number of retirees in the US market continues to increase. As per the U.S Census Bureau, “residents age 65 and over grew from 35.0 million in 2000, to 49.2 million in 2016, accounting for 12.4 percent and 15.2 percent of the total population, respectively”.6
- According to, the Merrill Lynch Finances in Retirement Survey, released in March 2017, the USA retirement population will increase by 10,000 new retirees a day, and that managing of retirement income will increasingly rely on the individual person.7(Merrill Lynch pp.6) The primary financial concern for retirement is the costs associated with health care.7(Merrill Lynch pp.12). “Increasing life expectancy, coupled with the aging of the large Baby Boomer generation, will potentially give rise to growing numbers of older adults confronting chronic diseases, such as arthritis, hypertension, heart disease, stroke, diabetes, cancer, and Alzheimer’s.”7(Merrill Lynch pp.15)
Conclusion
The market continues to grow not because of the injection of capital and support of the investors but the needs of the policy holders themselves.
The continued improvement in supporting regulation to encourage the market clearly refutes any previous cheap headlines portraying that the investors as taking advantage of the vulnerable.
While there is a bountiful amount of literature available on the asset class is clear that there are not particular ethical issues which should prevent you from investing; provided that the products and processes is stays fully transparent to all parties.
A life settlement offers a win-win outcome for both parties as an unwanted policy becomes a valuable, tradeable asset. The policy purchase is simply a negotiated financial transaction between a willing seller and a willing buyer.
As always, we wish you well with your investment journey and if you want to learn more about investing in this asset class please contact us.
About Global Insurance Settlements Funds PLC (GISF)
Global Insurance Settlements Funds PLC (GISF) is incorporated in Ireland as an umbrella type investment company with segregated liability between sub-funds. The first sub-fund launched, GIS General Fund (the Fund), is listed on the Irish Stock Exchange.
This structure is aimed at Sophisticated / Institutional investors and provides tax clarity by ensuring there is no tax leakage. It enables a number of different investment options to suit the specific needs of our investors.
The Fund’s core activity is to actively manage a large and diverse portfolio of life insurance policies (life settlements) issued by companies in the USA. Policies are sourced by licensed U.S. Provider companies and the Board of GISF select those that best meet the Fund’s policy purchase criteria.
Disclaimer: This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.
[1] N.Y.Naik and A.V.Juanário, 2013,Empirical Investigation of Life Settlements: The Secondary Market for Life Insurance Policies
[2] ThinkAdvisor, 2013, Texas lawmakers OK life settlement LTC financing bill, [online] Available at: <http://www.thinkadvisor.com/2013/05/29/texas-lawmakers-ok-life-settlement-ltc-financing-b?migration=1> [Accessed:22/09/2017].
[3] Life Insurance Settlement Association, 26th July 2017, Life Settlements Endorsed by NAIC Innovation Group as Private Market Option for Financing Long-Term Care Services, accessed 28th July 2017, <http://www.lisa.org/life-policy-owners/consumer-news/2017/07/26/life-settlements-endorsed-by-naic-innovation-group-as-private-market-option-for-financing-long-term-care-services>
[4] HealthView Services, 2017, Retirement Health Care Costs Data Report, [online] Available at: <https://www.hvsfinancial.com/2017-retirement-health-care-costs-data-report/> [Accessed:22/09/2017]
[5] Life Insurance Settlement Association, 2017, Consumer Advisors, Why Sell, accessed 28th July 2017, <http://www.lisa.org/consumer-advisors#tabs00 >
[6] United States Census Bureau, (22 June 2017) The Nation’s Older Population Is Still Growing, Census Bureau Reports, Release Number: CB17-100, Media Release, accessed 28th July 2017, <https://www.census.gov/newsroom/press-releases/2017/cb17-100.html >
[7] Merrill Lynch Wealth Management, March 2017, Finances in Retirement: New Challenges, New Solutions A Merrill Lynch Retirement Study, conducted in partnership with Age Wave, accessed 28th July 2017, <https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_Finance-Study-Report_2017.pdf >
