New Investment/Business Opportunity?

[jarmour]

Has anyone here read or done any work related to life settlements/beneficial interest deals on life insurance policies? Definitely seems like an emerging industry that could be extremely lucrative. Any input on the subject?

 

[FinanceDude]

Has anyone here read or done any work related to life settlements/beneficial interest deals on life insurance policies? Definitely seems like an emerging industry that could be extremely lucrative. Any input on the subject?

Yeah, the govt is poised to crack down on them dramatically due to abuse. Youi're late to the party..........

 

[brewer12345]

This is a fast growing area and increasing amounts of capital are going into this area. I think that to play here you would need to have a lot of money to invest, since you would need actuarial and legal expertise. I would also imagine that you would run a fair amount of regulatory and "moral hazard" risk.

 

[jarmour]

crack down on life settlements? I understand they are not regulated in most states but what can they do besides place some regulations on the industry? they can't possibly outlaw the selling of your life insurance policy, right?

 

[FinanceDude]

crack down on life settlements? I understand they are not regulated in most states but what can they do besides place some regulations on the industry? they can't possibly outlaw the selling of your life insurance policy, right?

Not yet.........but they can regulate the hell out of it. Think of the subprime guys. Those that survive the bloodbath will have so much regulation to deal with they will question if it's worth it.

Are we talking viattical settlements, or something else??

 

[jarmour]

Not yet.........but they can regulate the hell out of it. Think of the subprime guys. Those that survive the bloodbath will have so much regulation to deal with they will question if it's worth it.

Are we talking viattical settlements, or something else??

no not viaticals...those seem a bit more controversial. just regular life settlements.

 

[FinanceDude]

no not viaticals...those seem a bit more controversial. just regular life settlements.

tread carefully........

 

[MooreBonds]

Has anyone here read or done any work related to life settlements/beneficial interest deals on life insurance policies? Definitely seems like an emerging industry that could be extremely lucrative. Any input on the subject?

I'm the trustee for an irrevocable life insurance trust. I looked into the possibility of selling the policy (since there was some question of canceling the policy and investing the cash value elsewhere), but the quotes received were just under the accumulated policy cash value, given the (relatively) good health of the insured couple.

I've heard that investors/companies that buy the policies look for/price in an average return of 10%+ (+/-), assuming an average life expectancy, in order to make it worthwhile to buy the policy.

As far as approaching it as an investor, there's no way in hell I'd even consider it unless you had a chance at a good return (due to lack of diversifying risk...given the initial up-front investment require to buy out a sizable policy, all it would take is just one policy to pay out later than expected to really drive down your returns).

Also, as an individual, you're far more exposed to the inability to average out policy values. For instance, you could have a couple in their 60s with a policy face value of $5MM, and an individual male in his 70s with a policy face value of $1MM. Not only is it difficult to 'hedge' or average out the time you would have to wait to collect on the policy (given peoples' ages), but the policy amounts would likely be considerably different to the point of having difficultly managing or averaging out your cash flow.

I don't know of any opportunities (either publicly-traded, or investment opportunities available to the public) for this market. Usually, by the time its available to the retail market (usually through late-night and Saturday/Sunday afternoon infomercials and brokers advertising it to draw in new clients), the market would be saturated to the point of driving down expected yields.

The only area that an investor could have substantial consistent yields would be the terminally ill people that either have plenty to leave their heirs, or have no heirs whatsoever, and want to cash in to 'enjoy the money while they can'. To them, taking 90% (or much less) of the face value wouldn't be a big deal, as they would rather spend 80% of their policy's face value than let someone else enjoy the money.

 

[innova]

Google for 'death bonds' or 'profiting from mortality'. Apparently some enterprising folks have found a way to bundle these in aggregate and sell them as bonds

 

[jarmour]

I'm the trustee for an irrevocable life insurance trust. I looked into the possibility of selling the policy (since there was some question of canceling the policy and investing the cash value elsewhere), but the quotes received were just under the accumulated policy cash value, given the (relatively) good health of the insured couple.

Did you have to order life expectancy reports? I'm assuming it was a second to die policy so it would have been priced off of the longer LE of the two?

As far as approaching it as an investor, there's no way in hell I'd even consider it unless you had a chance at a good return (due to lack of diversifying risk...given the initial up-front investment require to buy out a sizable policy, all it would take is just one policy to pay out later than expected to really drive down your returns).

Also, as an individual, you're far more exposed to the inability to average out policy values. For instance, you could have a couple in their 60s with a policy face value of $5MM, and an individual male in his 70s with a policy face value of $1MM. Not only is it difficult to 'hedge' or average out the time you would have to wait to collect on the policy (given peoples' ages), but the policy amounts would likely be considerably different to the point of having difficultly managing or averaging out your cash flow.

I suppose that is true. The only way it seems like it would make sense is if you bought enough policies to mitigate your risk...and as an individual you might be looking at buying $100k-$500k policies.

As far as the example given, wouldn't a funder be able to calculate an IRR based on the life expectancy, face value, and annual premium required for the policy? I would think that they would take the LE and run an IRR a year or two past the predicted maturation of the policy...

 

[brewer12345]

As far as the example given, wouldn't a funder be able to calculate an IRR based on the life expectancy, face value, and annual premium required for the policy? I would think that they would take the LE and run an IRR a year or two past the predicted maturation of the policy...

That is more or less how t is done, but with an important caveat. An individual likely couldn't afford to buy enough policies to have a statistically valid block. Actuaries will tell you that if the block is too small, they cannot give you a valid estimate of policy duration, etc. because the sample size is too small.

 

[growing_older]

Yikes. If folks are buying these as individual policies as individual investors, then some investor somewhere has a big interest in my demise if I sell to him. I can understand the "securitization" if they are bought in large numbers and packaged in groups or tranches. But to have an individual holder of a life policy unrelated to the life insured and with a big return if only the (identifiable!) insured dies soon, sounds like a public policy menace. Not to mention a lucrative business for Soprano wannabees.

 

[FinanceDude]

Yikes. If folks are buying these as individual policies as individual investors, then some investor somewhere has a big interest in my demise if I sell to him. I can understand the "securitization" if they are bought in large numbers and packaged in groups or tranches. But to have an individual holder of a life policy unrelated to the life insured and with a big return if only the (identifiable!) insured dies soon, sounds like a public policy menace. Not to mention a lucrative business for Soprano wannabees.

One of the main tenets of life insurance is having to prove an "insurable interest" to get the policy written.

It reminds me of the guy that buys out lottery winners for a lump sum because they are strapped for cash..............

 

[Independent]

The way I heard the history, it goes like this:

At one time (we're talking late 19th century), there was no legal requirement for a cash value on whole life insurance policies. People in poor health, who couldn't afford the premiums, dropped the policies. That created a market for selling your policy to an investor. They soon had the spectacle of old people sitting on a stage while their policies were auctioned off. And of course they had the moral risk of "investors" with monetary intrest in the early death of the insured.

Eventually, we got regulations that required cash values. Interesting how the same idea reappears.

In most cases, today's cash value is calculated using mortality rates which are a little above expected, and interest rates which are somewhat low. If you plan to make a profit buying the policy for more the the cash value, you need an insured with some clear health problems.

(Of course, you could make a profit by buying the policies, packaging them, and selling 100% of the risk to investors who don't really understand what they are buying. You pocket whatever fee you can load into the deal and walk away.)

 

[MooreBonds]

Did you have to order life expectancy reports? I'm assuming it was a second to die policy so it would have been priced off of the longer LE of the two?

Usually, if you contact a broker, they (or the companies they sell the policy to) would pay for all medical tests, reports, etc. SOME brokers offer for you to pay for the reports out of your own pocket, with the assumption that you would be getting a higher net price for your policy (since the broker doesn't take a risk of paying for a report and not getting a commission off of it).

Yes, it was a 2nd to die policy. Basically, if both people are fairly healthy (standard class), it isn't worth it to investors to buy a 2nd to die policy if the age of the insureds is under 70, since there's a good chance at least one person will make it to age 90+.

what'smypolicyworth?com
Life Settlement Institute
LISA | Welcome to the LIFE INSURANCE SETTLEMENT ASSOCIATION
Selling Life Insurance Policy

The above are 4 websites I came across that had various value to me during my research.

 

[brewer12345]

Heh, unforseen complications of buying life policies. What happens if the owner of the policies goes bust?:

April 3 (Bloomberg) -- Ritchie Capital Management Ltd.'s two
bankrupt hedge funds were sued by an insurance company that is
trying to determine who should get $12 million in death benefits.
Genworth Life Insurance Co. said several parties claim to be
the beneficiary of life-insurance policies held by Herman Cooper,
who died in December. Genworth, in a lawsuit filed yesterday in
U.S. Bankruptcy Court in Manhattan, seeks to force the parties to
resolve who should get the money.
The insurer ``is unable to determine the validity of
defendants' competing claims'' and risks liabilities if it picks
the wrong one, according to the complaint, which also requests
payment of Genworth's legal costs. The company is a unit of
Richmond, Virginia-based Genworth Financial Inc.
The defendants include the Ritchie I and Richie II funds,
three individuals who hold trusts named in Cooper's policy, and
U.S. Bank NA, which acted as an intermediary when ownership of
the policy, taken out in 1997, was transferred in 2005.

 

[packrat44]

(Of course, you could make a profit by buying the policies, packaging them, and selling 100% of the risk to investors who don't really understand what they are buying. You pocket whatever fee you can load into the deal and walk away.)

There you go, bringing up the subprime lending issue again.

 

[MooreBonds]

Heh, unforseen complications of buying life policies. What happens if the owner of the policies goes bust?:

April 3 (Bloomberg) -- Ritchie Capital Management Ltd.'s two
bankrupt hedge funds were sued by an insurance company that is
trying to determine who should get $12 million in death benefits.
Genworth Life Insurance Co. said several parties claim to be
the beneficiary of life-insurance policies held by Herman Cooper,
who died in December. Genworth, in a lawsuit filed yesterday in
U.S. Bankruptcy Court in Manhattan, seeks to force the parties to
resolve who should get the money.
The insurer ``is unable to determine the validity of
defendants' competing claims'' and risks liabilities if it picks
the wrong one, according to the complaint, which also requests
payment of Genworth's legal costs. The company is a unit of
Richmond, Virginia-based Genworth Financial Inc.
The defendants include the Ritchie I and Richie II funds,
three individuals who hold trusts named in Cooper's policy, and
U.S. Bank NA, which acted as an intermediary when ownership of
the policy, taken out in 1997, was transferred in 2005.

I know that corporations are just as greedy as some unscrupulous individuals...but I wouldn't expect a company like US Bank to try and snare some cash just because they were an intermediary back in 2005 when the policy was apparently sold to Ritchie I and II. I think that's a little ridiculous!

And I would hope that the documents were fairly clear when the policy was sold. I would presume that the creditors to the Ritchie I/II funds would have gained ownership over the policies (unless it's still in Bankruptcy court under a judge's oversight). Just because some trusts were named as beneficiaries in the original policy and are present in the original contract, it means jack crap if the policy were later validly and legally sold by the policy owner.

What's further confusing is that you would think that Ritchie I/II would have had a history of either paying premiums to Genworth, and/or that Genworth would have ample legal documentation from the original policy owner agreeing that the ownership of the policy was transferred...but, whenever someone cries foul and a lawyer appears on the scene, everyone goes to battle stations and the legal costs start soaring no matter how much of a valid threat it is.