Since the origination of our fund we have only ever considered US life insurance policies. What motivates us to look at USA life insurance policies above all others? Below we name the most motivating features to consider the USA life polices for your life settlements investment.
1. The US Legislative Environment for Life Settlements
The legislative environment, surrounding life settlements in the USA, is continually adapting to protect both buyer and seller. The socio-economic environment in the USA, funding of healthcare and long-term care, is propelling the growth in the sale of life insurance policies. With this comes the strengthening of legislation and its stance on transparent business practises.
A growing number of American states include Life Settlements under their definition of securities. Additionally, other states have adopted the consumer protection approach, or both. Some states have used existing insurance regulations to control potential fraud. In some states there is a fiduciary duty to tell prospective clients that there is an option to sell their life insurance policy to the life settlements market.
“43 states and the territory of Puerto Rico regulate life settlements, affording approximately 90% of the United States population protection under comprehensive life settlement laws and regulations.” [1]
The influence of legislation varies from state to state. It takes an experienced market player to understand the impact to the investors. We believe that there is no other country who has the same level of legislative diligence as the US life settlements market.
2. The Non-Contestability Clause
Investors should take a note of the most popular feature of USA life insurance policies, the non-contestability clause. This is designed to prevent life insurance companies from refusing the payment of a death benefit after the contestable period. The contestability periods for life insurance are typically two years (although they vary by state). After this period ends, the insurer is legally obligated to pay the death benefit and has lost the right to contest the policy.
Reputable insurance companies originally introduced the incontestability clause in the late 1800s. This was an effort to build consumer trust and clean up the industry’s image. In the 20th century states began introducing legislation requiring the incontestability clause. Today, almost all US life insurance policies will contain this provision in some form. For investors, in the life settlements market, this proves to be one of the strongest protections for their maturity claims.
3. The Market for USA Life Insurance Policies
One of the most significant aspects of the USA life settlements market is the potential for growth. Investing in life insurance, or more candidly in the mortality of the insured, corrects a market inefficiency. There are number of drivers that lead to the sale of life insurance policies. The following are two of the most recent and significant. They have potential to dramatically alter the size of the market.
- Health Care and Long-Term Care (LTC)
- Tax Reform
These two socio-economic divers affect the market in different ways.
Health Care and Long-Term Care (LTC)
There is every growing concern for the retiring population, in the US, and the expense of long term care (LTC). According to Merrill Lynch, the USA retirement population will increase by 10,000 new retirees a day. Therefore, the costs associated with health and long-term care is the primary financial concern for retirement. [2] (Merrill Lynch, 2017, p.12). As more baby boomers enter retirement, life settlements are becoming a very attractive method of obtaining the necessary funds to pay for LTC. Additionally, investors who are unable to compete in higher face polices, $1 million-plus policy, are considering lower face policies to enter the market.
Tax Reform
The recent tax reform, Tax Cuts and Job Act of 2017 (TCJA), might also give rise to the growth of the life settlements market especially in the higher face policies. Many people who were facing the estate tax used life insurance as a funding mechanism to pay the estate tax. Furthermore, some individuals who were a perfect candidate to sell their life insurance policy were placed in a less favourable tax position. In comparison to someone who surrendered a policy to the insurer.
The tax changes reduced the need for some individuals to have life insurance to protect an estate from federal estate taxes. Additionally, improving the tax situation surrounding the sale of a life insurance policy. Consequently, these recent changes may influence the drive for policy holders to sell their life insurance.
The socio-economic factors drawing sellers into the market is the key to market growth. Some believe that these factors will increase supply. As a result, more capital is needed to accelerate market growth in the secondary market.
4. The Diversification of Insurance Companies
An additional feature which makes the US market a great candidate for life settlements is the life insurance companies. The life insurance market in the United States is both large and highly competitive. The scope of highly rated insurance companies is also one of the key reasons we only invest in US life settlements. It allows us, as the fund manager, to offer a high level of diversification in our asset selection.
5. The Competition in The Market
The process of purchasing life settlements can be complex, if the investor is not confident in the evaluation of the service provider expertise. Life policies are typically purchased through a US licensed provider. During the process, both provider and the buyer will seek reports from legal, actuarial and underwriting parties for each policy. In many cases involving multiple parties for the same task, ie underwriting, to broaden the understanding of risk and reward.
Since the 80’s the parties to choose from has grown substantially with the growth of the asset class. As a result, competition in this market is fierce. It can be daunting to evaluate the efficiently of all the parties involved. Investors should consider hiring experienced asset managers to get past the “marketing pitch”.
Like any investment life settlements requires proactive and experienced asset managers. Managers play an important role as they work on minimising your exposure to loss whilst increasing your return potential. A process which needs a hands-on approach that cannot be solely performed by a software program. There is no benchmark or index for life settlements and investors cannot rely on this to compare the different parties involved.
Inventors need to be clear in their understanding of why one state, insurance company or type of policy is better than the other. Hire an experienced party to act for you or educate you on all aspects of the risk-reward efficient frontier. Let this understanding empower you to fittingly evaluate service providers.
The key is to find a manager or service provider who is both skilled and willing to be transparent in their processes. Be critical of managers who gloss or pitch smooth returns. Buying good policies is one thing, avoiding bad policies and excess risk is another matter.
Could life settlements work in other countries?
We have been consulted by investors wanting to purchase other locality insurance policies. Certainly there are other markets exploring possibility. In contrast to the US these are in their infancy. Germany and Canada are an example but they still have a long way to go.
The future is looking bright and stable for the growth of the US life settlements market.
As always, we wish you well with your life settlement investment opportunities 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. The fund permits 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.
[1] Life Insurance Settlement Association, 2017, Life Settlements Regulation, accessed 28th July 2017, (http://www.lisa.org/industry-resources/life-settlement-regulation)
[2] 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 )
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.
