A life settlement is a financial transaction in which a life insurance policy owner sells their policy to a third party. The purchaser becomes the beneficiary of the policy in addition to assuming responsibility for all subsequent premium payments.

Generally speaking, life settlements are an option for high-net-worth policy owners aged 65 or older.  Independent estimates report that, among this group, 20% of policies have a market value that exceeds the cash value offered by the carrier.  Most settled policies are Universal Life (UL) policies which provide coverage for the entire life of the insured.  Policies typically have a face value between $100,000 and $10,000,000 and have been in-force for over two years so as to be outside of the insurance company’s contestability period.

Reasons for a Life Settlement

There are a number of reasons why an individual may consider selling their life insurance policy in a life settlement transaction:

• Initial beneficiary is no longer living and therefore coverage is no longer needed
• Premiums are no longer affordable
• Current policy is underperforming
• Insured has long term care needs to be funded
• Changes in estate planning have taken place

Many financial advisers have adopted life settlements as a sound financial planning option.  In fact, a growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial adviser.

History of Life Settlements Market

Life settlements, as an industry, may be traced back to the 1980’s and the onset of the AIDS epidemic in the United States. In the 1980’s, AIDS victims faced an extremely short life expectancy.  In order to pay for costly medical bills, many of these individuals sold their life insurance policies. It was under these circumstances that the first viatical settlements occurred.

A viatical settlement is structurally similar to a life settlement but is based on a terminally ill patient, typically with a life expectancy of less than two years.  As medical advancements increased the life expectancy of those living with AIDS, viatical settlements became less economically viable.

As viatical settlements fell out of favor the focus shifted to another group of individuals with similarly predictable life expectancies, US seniors.  In a life settlement transaction, the policy owner is usually at least 65 and not terminally or chronically ill. Just as in a viatical settlement transaction the individual sells the policy to a third party for a lump sum.  The amount that the individual receives is more than the cash value offered by the life insurance company.

Future of Life Settlements Market

Source: Life Settlement Market - Increasing Capital and Investor Demand 2007, Conning Research & Consulting Inc and Peachtree Asset Management estimates

The life settlement market has witnessed significant growth in previous years, with traded volume increasing from just over $1B in 2000 to over $16B in 2008.  The outlook for life settlements as an industry is bright as many economic and demographic trends will keep this transaction in high demand.  

It is estimated that over $500 billion in life insurance is currently in-force on seniors over age 65 – of this roughly 20%, or $100 billion, is predicted to be ideal for a life settlement.  Also, the segment of the population aged 65 and older is growing three times faster than any other age segment, and is projected to be over 40 million people by 2010 according to the US Census Department.  Because the bulk of the baby-boom generation is beginning to reach the target age for life settlements there is likely to be a steady influx of new individuals looking to sell their no longer needed life insurance policies. 

With increasing consumer awareness of the benefits that life settlements offer, a steady flow of high-quality assets are assured to meet the growing investor demand.

Life Settlements at Peachtree

The team at Peachtree Asset Management has widespread experience in the Life Settlements market.  Many of our professionals have been pioneers in the industry since its beginnings working to develop the market into what it is today.  PAM is able to leverage the extensive origination capabilities of the parent company, Peachtree Holdings, to gain access to high-quality product at market leading rates.

Peachtree Holdings has established processes to facilitate highly efficient and cost effective origination, underwriting, funding and servicing of life settlement assets.  From 2003 to 2007, the Company originated life settlement policies with a face amount (NDB) of approximately $4.2 billion. 

The extensive network of relationships that Peachtree has developed within the life settlement industry keeps us at the forefront of the industry and ahead of any market trends.