A life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit to a third party. A life settlement focuses on policies insuring older individuals, typically 65 or over, with life expectancies of at least two years.
In the United States, there is a total of $17 trillion in existing life insurance policies; currently persons over age 70 hold in excess of $257 billion in Whole Life insurance, over $370 billion in Universal Life, and over $60 billion in Variable Universal Life1. The majority of life settlement transactions involve the sale of Universal Life (UL) or flexible premium life policies. Since the introduction of Universal Life policies in the 1980s, this form of life insurance has become extremely common and widely available, and many of these policies are now being offered for sale in the life settlement market.
Structurally, the market is divided between the secondary and tertiary markets. Secondary market transactions are conducted through licensed life settlement providers and sold to investors and funding sources. The tertiary market refers to the market where investors buy and sell existing life settlements after the initial purchase of the life settlement policy is complete.
Those selling their policies are typically either elderly individuals who have outgrown the need for their policies or businesses that no longer want to own policies. The demand side of the life settlement after-market (those buying the policies) is typically made up of large financial institutions (banks, insurance companies, pension plans, etc.) that recognize the potentially high yields life settlement investments can offer. More recently, high net worth investors are buying individual life insurance policies or investing in pools of policies. A life settlement transaction can be mutually beneficial for both the seller and the buyer. The seller is able to sell the policy for more than the cash surrender value offered by his or her life insurance company, and the buyer is able to purchase an investment vehicle with an attractive potential rate of return.
Regulatory usage of the terms “viatical settlement” and “life settlement” varies by state. The industry generally uses the term “viatical settlement” to refer to instances where the insured is terminally ill with a life expectancy of less than two years. CCA engages in life settlements, rather than viatical settlements, as its principal focus.
1Conning Life Settlements, 2014, 72.