As consumers come to grips with the reality of life settlements, a growing number of large institutional investors are realizing the huge potential for returns and are jumping into the multi-billion dollar industry. But where does the small investor fit in?
In spite of what the corporate landscape may suggest, there are ways a small investor can capitalize on the newly regarded asset class. Investors should proceed with caution, however, as the speculative quality of life settlements remains a topic of heated debate.
Taking another look at life insurance
With the decision by the Financial Accounting Standards Board (FASB) a few years ago to recognize the true market value of a life insurance policy, life insurance is now considered a legitimate asset as well as insurance, Doug Head, executive director for the Life Insurance Settlement Association, said. Still, “a lot of people have not looked at it that way,” he said.
As word gets out about life settlements as an alternative to surrendering or lapsing a life insurance policy, consumers are catching on to the fact that their human life value–or the maximum amount of life insurance they can obtain, based on income and assets–can be realized in the life settlements marketplace.
Source: Conning Research report 2007 “Before this marketplace opened up, [a person’s human life value] was just a mere statement of fact, maybe interesting at a cocktail party, but really meant nothing to the individual who had that ability,” David Kane, president of the benefits division at York International, said. “Now that ability has become an asset and many people will say ‘well let me buy four million dollars worth of insurance, and [after the contestability period], I’ll sell it.’”
Thus, the life settlement marketplace presents consumers with an intriguing opportunity to invest in their own life insurance. In other words, the fact that life insurance is an asset that can be bought and sold like other types of property might encourage consumers to purchase more life insurance coverage once they know there is liquidity for that asset in the future.
Life insurance companies adjust, react
Life settlements only capture a sliver of the market, at 0.1 percent of the total face value of insurance policies issued in 2006, according to research by Conning. However, life insurance companies are anticipating the effect that a growing number of life settlements will have on their business operations. This is because life insurance companies traditionally price their products based on an anticipated amount of lapses, some of which may not happen as consumers conduct life settlements as an alternative to surrendering their policy, Kane said.
“The insurance industry as a whole is in a bit of an uproar, because they have some fear about…[having] adequate reserves to pay all these claims [they hadn’t expected to ...
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