Since the origination of our fund, we have only ever considered US life insurance policies. What motivates us to buy US life settlements policies above all others? Below we name the most motivating features to consider the USA life policies 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 on 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 note of the most popular feature of USA life insurance policies, the non-contestability clause. The contestability periods for life insurance are typically two years (although they vary by state). So, 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 is a number of drivers that lead to the sale of life insurance policies. The following are two of the most recent and significant. They have the 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). Certainly, 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 policies, $1 million-plus policy, are considering lower face policies to enter the market.
If an elderly person is fortunate enough to have a life insurance policy, then a life settlement can be a good source of funds to pay for long-term care. Seniors need multiple options for funding long-term care. In most cases, savings and accepting the cash surrender value (CSV) of the policy aren’t enough. Certainly, for many in long-term care and significant illness situations, there is no other alternative source of funds.
In addition to turning a lump sum payment, life settlements eliminate premium payments for the former policy owner. Certainly, this can be very helpful to a family with finances already stretched to the limit with long-term care costs.
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. Typically, life insurance policies were used as a funding mechanism to pay 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 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 policyholders to sell their life insurance.
The socio-economic factors drawing sellers into the market is the key to market growth. Furthermore, some believe that these factors will also increase supply. However, to accelerate growth in the secondary market more capital is needed.
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. Certainly, it allows us, to offer a high level of diversification in our asset selection.
5. The Competition in The Market
The process of buying life settlements policies can be complex if the investor is not confident in the evaluation of the service provider expertise. Purchasing USA life policies are typically done through a licensed USA 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. To get past the “marketing pitch”, investors should consider hiring experienced asset managers
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.
Skills and willingness in being transparent in their processes are the features for investors to consider when comparing managers. 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?
Previously, investors have consulted us wanting to purchase other locality insurance policies. Certainly, there are other markets exploring the possibility. In contrast to the USA, 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 USA 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. It 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. Licensed U.S. Provider companies source these policies. Meanwhile, the Board of GISF selects 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. It 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.
