Life Settlement Literature Review

gigantium humeris insidentes

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Read me first please!

• The website is updated on a regular basis. Note that only journal articles (mostly peer-reviewed) are included in the repository.
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1996

Angels of Mercy or Greedy Capitalists? Buying Life Insurance Policies from the Terminally Ill

Schultz, Denise M. (1996) Pepperdine Law Review

NA
Abstract |Local file in Dropbox|

In response to the financial hardships burdening AIDS patients and other terminally ill individuals, the “viatical settlement” industry has emerged. Although as a general rule the purchaser of an insurance policy must possess an insurable interest in the insured’s life, controversy exists as to whether a person without an insurable interest, such as a viatical settlement company, may obtain an insurance policy by assignment. This goal is accomplished by requiring viatical settlement companies to procure a witnessed, signed statement from the terminally ill individual attesting that the viator freely consents to the contract, acknowledges the illness, understands the risks and benefits of the settlement, and releases all medical records to the viatical company. Opponents contend that licensing requirements stifle a terminally ill individual’s opportunity to take full advantage of the viatical settlement industry by excluding willing purchasers from the market. The ruling addressed a taxpayer’s irrevocable assignment of a life insurance policy to a viatical settlement company for approximately sixty-three percent of the policy’s face value. The Service ruled that amounts received from the assignment of the life insurance policy to the viatical settlement company were “not amounts received under a life insurance contract by reason of the death of the insured.

1997

The Death of Death Futures - The Effects of the Health Insurance Portability and Accountability Act of 1996 on the Insurance and Viatical Settlement Industries

Spurrier, Andrew (1997) Connecticut Insurance Law Journal

The HIPAA has given the viatical settlement industry a measure of legitimacy it has historically lacked; the full effect of federal recognition on viatical settlement providers remains to be seen.
Abstract |Local file in Dropbox|

As the viatical settlement industry developed, insurance companies began to respond to the needs of dying insureds by providing accelerated death benefit provisions and riders as part of life insurance coverage. The insured is paid the present, or “discounted,” amount of the death benefit, the viatical settlement provider using the same method that an insurance company might use. In most situations, the viatical settlement provider, now the owner of the insurance policy, assumes the costs and benefits of maintaining the policy: paying premiums to prevent the policy from lapsing, collecting dividends, and receiving the insured’s death benefit when death occurs. A viator’s sale or assignment of an insurance policy to a qualified viatical settlement provider must be of a life insurance contract. E. Failure to tender the viatical settlement by the date disclosed to the viator renders the contract null and void. Further Federal regulation of the viatical settlement industry may ultimately arise due to the increased scrutiny of the industry by the Securities and Exchange Commission (“SEC”), especially in the wake of new viatical settlement provider investment strategies and outbreaks of broker malfeasance.

Accelerated Death Benefits, Viatical Settlements,and Viatical Loans: Options for the Terminally III

Schmidt, Paula (1997) Journal of Actuarial Practice

Because of issues regarding estate tax and estate/inheritance tax treatment of the death benefit remaining after acceleration. and other issues, some insurance companies have been waiting to initiate and introduce accelerated benefits.
Abstract |Local file in Dropbox|

There are three options available for terminally ill insureds who are interested in accessing all or part of the face value of their life insurance policies: through the life insurance company (accelerated death benefits), through a viatical company (a viatical settlement), or through a viatical loan company (a viatical loan). This paper explores the definitions and tax regulations, calculations, and the claims process associated with accelerated death benefits and via tical settlements and loans.

Viatical Settlement and Accelerated Death Benefit Law: Helping Terminal, but Not Chronically Ill Patients

Eremia, Alexander D. (1997) DePaul Journal of Health Care Law

Because it is generally too difficult to determine the life expectancy of a chronically ill person, it is unlikely that VSPs will viaticate or insurance companies will accelerate the policies of such individuals.
Abstract |Local file in Dropbox|

Even those with health insurance often find their coverage insufficient to pay for all necessary medical expenses. In an effort to ease the financial burdens imposed on the terminally or chronically ill, the Health Insurance Portability and Accountability Act of 1996 (HPAA) was amended. As such, a chronically ill individual is one who has been certified by a licensed health care practitioner, within the preceding twelve month period, as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least ninety days due to a loss of functional capacity. An individual may also be deemed chronically ill if she is certified by a licensed health care practitioner within the preceding twelve month period as having a level of disability similar to the level of disability described above, or requiring substantial supervision to protect such an individual from threats to health and safety due to severe cognitive impairment. To reduce the burdens imposed on the government and the family of a chronically ill individual, tax incentives which encourage home health care could be provided to relatives or guardians of the chronically ill individual.

2001

Analyzing an Emerging Industry: Viatical Transactions and the Secondary Market for Life Insurance Policies

Giacalone, Joseph A. (2001) Southern Business Review

Accelerated death benefits and the increased regulatory oversight challenges the life settlement industry.
Abstract |Local file in Dropbox|

Traditionally, life insurance has been primarily viewed as a legacy paid to designated beneficiaries after the death of the insured. Increasingly, financial planners, estate planners, and other financial advisors are advising clients to consider their life insurance policies as an underutilized asset that can provide significant financial resources to them while they are still alive.

2002

Life Settlements and Trust Accounts: A Possible Modification of the Trustee’s Responsibility?

Miller, Dean Edward (2002) Banking Law Journal

In case where a substantial portion of the assets of a trust is an unmatured life policy, a trustee subject to the Uniform Prudent Investor Act must consider whether it is oblidged, by its fiduciray duty, to seek a buyer for that policy.
Abstract |Local file in Dropbox|

According to the author, developing trust law may now impose new duties upon the trustees of trusts holding life insurance policies; one salient cause of this development of trust law is the emergence of the life settlement. This would seem to mean, at the least, that in numerous instances a bank or trust company serving as trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement.

Assessing Clients’ Life Settlement Offers

Katt, Peter C. (2002) Journal of Financial Planning

The life settlement firm isn’t in the business to determine what is in the best interests of prospective sellers, so policy holders should have an independent financial analysis done before a policy is sold.
Abstract |Local file in Dropbox|

Life settlement refers to the purchase of unneeded life insurance policies. This article examines whether life settlements are likely to be of value to your clients. A discussion of the difference between needed and wanted life insurance seems to miss the point in the context of life settlements that, by definition, only involve insureds who are in much worse health than when they bought their life insurance policies. The only reason this so-called life insurance secondary market can exist is because the subject policy has become much more valuable due to the insured’s poor health. This makes such a policy anything but unneeded.

You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly

Perez, Jessica Maria (2002) Elder Law Journal

Despite criticism associated with the viatical industry of the 1990s, the senior settlement industry of the new millennium is a modern and improved system, providing the elderly with a viable financial alternative for long-term care.
Abstract |Local file in Dropbox|

As seniors struggle to keep pace with medical care costs and other expenses, many must look to alternative sources of financial freedom. Senior settlement agreements, through which a senior may sell her life insurance policy to a third party for a percentage of its future value, may provide one such alternative. In this Note, Jessica Maria Perez explores the history of senior settlement agreements from their birth as sisters to similar agreements made by the chronically ill, to the present in which they are increasingly entered into by healthy seniors. Perez analyzes the positive and negative aspects of these agreements from basic economic risk to ethical issues to tax implications. She analyzes recent regulatory developments in this area, including the Viatical Settlements Model Act and various state statutes. Perez recommends increased regulation at the state level, encouraging states to adopt the Model Act. She also recommends that these transactions be made tax-exempt and that attorneys play a greater role in the making of senior settlements. With these reforms, Perez suggests that the senior settlement agreement can be a safe and effective method by which seniors can realize financial freedom.

2003

How Life Settlements Fit Into The Impaired Risk Picture

Winer, Teresa R. (2003) National Underwriter

The advisor and client need to work together to evaluate the risks and opportunities.
Abstract |Local file in Dropbox|

Reports developments related to the financial services industry in the U.S. Definition of life settlement market; Inclusions of the viatical transactions; Issues on impaired risk.

Life Settlements and the Planning Opportunities They Offer

Leimberg, Stephan R.; Gibbons, Albert E. (2003) Estate Planning

Life settlements make the most sense where it is likely that, in spite of significant health impairment, the insured may live beyond the point where continuing to pay premiums is economically feasible and the death benefit is exceeded by the overall (including time value of money) cost, a risk that the life settlement company can afford to take because of the pooling concept.
Abstract |Local file in Dropbox|

An interview with Martyn S. Babitz, an attorney and senior wealth planner with PNC Advisors’ Wealth Planning Group, regarding strategies using life settlements, is presented. The actual amount a policyowner will receive from a viatical or senior settlement will depend on numerous factors, including: 1. the type of policy being sold, 2. the face amount (death benefit) of the policy, and 3. the amount of future premium obligations (which will no longer be the insured’s obligation). The proceeds of an insurance policy held by the insured on his or her life are included in the gross estate of the policyowner if he or she dies owning the policy. To avoid estate tax on these insurance proceeds, the owner may want to give the policy to an irrevocable trust or outright to the intended beneficiary(ies). But, under Section 2035, if the owner dies within three years of such a transfer, the death proceeds will be included in his or her taxable estate. To avoid this problem, the policyowner could sell the policy and at some later date, gift the proceeds of the sale.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

Consider Life Settlements As An Option For Divesting Life Policies

Arenson, Steven; Miller, Robert G. (2003) National Underwriter

A life settlement can be the means to a client’s financial planning end, delivering the highest economic value and the best solution for changing needs.
Abstract |Local file in Dropbox|

Provides tips in divesting life policies in the U.S. Partial-surrender of the policy; Practice of non-forfeiture provisions; Conversion of the policy into a gift.

The Benefits of a Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Real Property, Probate and Trust Journal

The secondary market of life insurance provides liquidity and enhances policy value, which benefits policyholders and feeds back to the primary market in an expansion of demand.
Abstract |Local file in Dropbox|

This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of “impaired’’ policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

2004

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

Using Life Settlements to Tap the Value of Hidden Assets

Friedman, Lori (2004) CPA Journal

In select circumstances, life settlements provide a win-win way to receive value in excess of the simple cash value of a policy, while gaining a tax advantage and putting more cash into a business, an acquisition, or an individual’s retirement.
Abstract |Local file in Dropbox|

In the past, the owner of a life insurance policy who no longer wanted to retain the contract had two options: allow it to lapse or surrender the policy. A new option can tap the hidden value of these policies. Under the right circumstances, life settlements provide value in excess of the cash value built up within these policies. In many respects, it works like found money for a company or individuals who might otherwise simply walk away from a policy rather than continue to pay premiums.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

CPAs and Life Settlements: Due Care, Competence, and Objectivity

Roth, Ronald M (2004) CPA Journal

A life settlement can remove the policy from the taxable estate, avoiding application of the three-year rule under IRC section 2035, in order to transfer additional assets tax-free to descendents.
Abstract |Local file in Dropbox|

In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products.

Life Settlements: A Second Look at a Secondary Market

Brecka, Gary; Virkler, Tom (2004) Journal of Financial Service Professionals

While unable to escape its history, the life settlement market has nonetheless avoided repeating mistakes of that history by emerging as an important and growing element of the financial planning world.
Abstract |Local file in Dropbox|

The unacceptable conditions and environment of the formative life settlement market have, understandably, left a bad impression in the minds of many within the life insurance planning industry. However, this dappled history of viatical sales should not predispose a planner to avoid a thorough examination and understanding of the current, rapidly expanding market for life insurance contracts. Today’s life settlement transactions bear little or no resemblance to the viatical sales of yore. Owners of an insurance contract can collect the proceeds payable under the contract upon the death of the insured, or they can sell the policy for its current market value. Institutional investors have come to realize that big blocks of properly underwritten policies acquired through life settlements can form a very predictable, very conservative, and very profitable source of income. Life insurance planners must not avoid involvement in or proper encouragement of life settlement options in the financial plans of their clientele.

The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s Hidden Value

Doherty, Neil A.; O’Dea, B.A. Brian A.; Singer, Hal J. (2004) Marquette Elder’s Advisor

Access to complete and current information regarding their secondary market options would allow policyholders to make optimal decisions regarding their insurance coverage and enable the secondary market to reach its full potential in terms of the welfare gains if provides to consumers.
Abstract |Local file in Dropbox|

Increasingly common usage of the secondary market for life insurance policies is discussed in this article which explains the secondary market and describes the benefits of viatical and life settlement firms as well as accelerated death benefits. Changing regulations of the secondary market and suggested ways for counselors to assist clients in specific circumstances are included.

Life Settlements: An Insurance Planning Tool

Greenberg, Valerie (2004) CPA Journal

Ideal institutional funders are not self-creared companies or trusts that hold investment capital, but world-recognized financial institution who can provide safeguards for advisors and clients.
Abstract |Local file in Dropbox|

Life settlements are a new insurance planning tool for older individuals in which a third party, preferably institutionally funded, purchases a senior’s existing life insurance policy for more than its cash surrender value (CSV). Life settlements are especially valuable when used for trustees. Life expectancy on life settlements can be up to 15 years. When looking at existing life insurance policies, the following situations may be possibilities for life settlements: business succession, trust administration, estate or financial planning, commercial lending, bankruptcy, divorce, charitable giving, and discontinued employee or executive retirement programs. A policy carried on the books as “no value” and ready to be dropped may turn out to be worth a great deal in a life settlement. Other types of policies that can be purchased include term, universal, whole life, variable, and group. Policies can be owned by individuals, trusts, and companies.

An Introduction to the Use of Viatical and Life Settlements

Rios, Damien (2004) Estate Planning

Before entering into a viatical settlement contract, policyowner and the policyowner’s advisors should consider all options available to the policyowner, fully understand the process involved in a viatical settlement, and know what rights the policyowner has under applicable law and the governing documents.
Abstract |Local file in Dropbox|

The viatical settlement market provides a valuable alternative to policyowners who no longer wish to keep their life insurance policies, but are not satisfied with the financial return that may be available if the policyowner surrenders the policy to the insurance company. The policyowner or the policyowner’s advisors should determine whether the viatical settlement is a regulated transaction under applicable state law and whether the purchaser must be licensed to purchase the policy. If a license is required, the policy-owner or advisor should verify that the purchaser has the appropriate license by either requesting a copy of the license from the purchaser or contacting the division of insurance in the appropriate state. Lastly, the policyowner should consult his or her advisors concerning the tax consequences of the viatical settlement, the effect that the receipt of the viatical settlement proceeds may have on the policy-owner’s eligibility for government assistance, and any effect the viatical settlement may have on the policyowner’s rights against creditor’s claims.

Helping Your Clients Sell Unneeded Policies

Simon, Larry A. (2004) National Underwriter

A good settlement candidate has an universal insurance policy with above half a million coverage and a life expectancy between 2 to 10 years.
Abstract |Local file in Dropbox|

The majority of life insurance policyholders let their policies lapse or surrender the policies for a minimal cash value. The wealth lost as a result of these policy surrenders is significant. The National Association of Insurance Commissioners, Kansas City, MO, estimates that in 1996, for example, nearly $1.5 trillion in life insurance face amount lapsed or was canceled by policyholders. Today, the life settlement market is giving financial advisors the means to help policy owners extract the wealth trapped in unneeded life insurance policies. Unlike viaticals, life settlements are based on the proposition that some insured individuals no longer want, need or can afford their coverage. Life settlements aren’t for everyone. A good candidate typically has $500,000 or more in universal life coverage. Life settlements are designed for people who are not suffering from a life-threatening or catastrophic illness and whose life expectancy is about 2 to 10 years.

2005

Stranger-Owned Life Insurance (‘SOLI’): Killing the Goose That Lays Golden Eggs!

Leimberg, Stephan R. (2005) Estate Planning

In a charitable context, investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitable-minded, and generous donors, which could hurt the charities and trigger a sea change in the way all life insurance is taxed and priced, and in extreme cases encourage criminal activity of the worst kind.
Abstract |Local file in Dropbox|

Stranger-Owned Life Insurance (SOLI) is a rapidly spreading virus that is infecting both individuals and charities. The end result is likely to be a lose-lose-lose situation for the public, the insureds, their families, and the insurance and estate planning communities. In fact, everyone is likely to lose - except the promoter-marketers and third-party investors they assemble to finance what is clearly an end-run around centuries old insurable interest laws. The promoter’s claim is that this arrangement is “a life insurance windfall for charity - without buying a policy or paying anything at all.” These are highly complex and speculative arrangements in which investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitably-minded, and generous donors.

Life Settlements: A Legitimate Financial Planning Tool

Gardner, Rick (2005) Journal of Practical Estate Planning

A broker who has direct contracts with many funding companies has a much better opportunity to obtain the best offer for policyholders.
Abstract |Local file in Dropbox|

A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are becoming recognized by planning professionals as a viable financial planning tool. Reasons why a client may want to consider selling an insurance policy include: 1. insurance needs have changed, 2. premiums have become unaffordable or inconsistent with current needs, 3. estate planning goals have changed, 4. cash is needed to fund a different life insurance policy, annuity, or investment, 5. funds are needed for long-term health care, and 6. funds are needed as a source of cash for charitable giving. Values-based case studies are presented. Total premiums paid by the policy owner are nontaxable and are the owner’s cost basis. If the cash surrender value is greater than the total premium paid, the difference would be treated as ordinary income. It is important to choose a life settlement broker who shows a steadfast commitment to doing what is best for the client. A good broker will diligently seek out and negotiate the highest offer.

Securitization of Life Insurance Assets and Liabilities

Cowley, Alex; Cummins, J. David (2005) Journal of Risk and Insurance

Life insurance and annuity securitizations will not achieve the level of success of mortgage-backed securities and other types of asset-backed securities until a substantial volume of transactions reaches the public markets.
Abstract |Local file in Dropbox|

The material in this article has been co-authored by Alex Cowley and J. David Cummins and reflects solely the opinion of the co-authors and not that of Lehman Brothers or the Wharton School. The article should not be construed as a product of Lehman Brothers or its Research Department. It is for informational purposes only and has been compiled based upon publicly available sources of data. The co-authors assume full responsibility for its contents. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are solely those of the co-authors and are subject to change without notice. Readers are advised to make an independent review regarding the economic benefits and risks of any of the transactions described herein, including without limitation purchasing or selling any of the financial instruments mentioned in this article, and must reach their own conclusions regarding the legal, tax, accounting, and other aspects of any transaction involving the financial instrument in relation to their particular circumstances.

Turn Unneeded Policies into Cash

Warring, James D. (2005) Journal of Accountancy

A life Settlement can be a better alternative than surrendering a policy, especially with the possible repeal of the federal estate tax still on the horizon.
Abstract |Local file in Dropbox|

Life insurance planning isn’t always about making sure someone has enough coverage. It’s also about finding solutions for people who have too much. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option-a life settlement-to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured’s death. A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy’s face amount and cash surrender value as well as other factors, such as the insured’s health, age and the current policy premium.

Reaching Affluent Senior Life Settlement Prospects

Simon, Larry A. (2005) National Underwriter

Do: use photos of seniors enjoying their wealth, include clippings of articles you have written for local publications; don’t: ignore state licensing rules, violate state life settlement advertising filing requirements.
Abstract |Local file in Dropbox|

Selling a life insurance policy through a life settlement may be a major step for a policyholder, even if the policyholder is a high-net-worth client. Marketing life settlements to this group can present a unique set of challenges. These guidelines should help: 1. Members of this group are very careful about those with whom they do business. 2. Hard sells rarely work on affluent seniors. 3. Photos send a message. 4. Seniors have time to read. 5. Before publishing or distributing advertising or marketing materials, and when designing your Web site, always give careful consideration to legal and regulatory requirements in the states in which your information will be disseminated. 6. Licensing requirements also should be considered carefully.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

Life Settlements: Means for Cashing In Key-Person Policies

Simon, Larry A. (2005) Financial Executive

When an insured key person retires or resigns, instead of cancelling its corporate-owned policy and taking the cash-surrender value, if any is remaining, the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well.
Abstract |Local file in Dropbox|

When an insured key person retires or resigns, the company often cancels its corporate-owned policy and takes the cash-surrender value, if any is remaining. Life settlements provide a viable and attractive option: the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well above the cash-surrender value. In a nutshell, a life insurance policyholder sells the benefits of the policy to an investor. Most investors do not directly negotiate with policyholders; rather, they provide financing for life settlement companies that facilitate buying the policies. Policy owners should insist that their agents and brokers perform due diligence by gathering information from several competitive life settlement companies.

Keeping a Policy

Jones, Lucretia DiSanto (2005) Advisor Today

A lot of estate value is destroyed through sale of a life insurance contract.
Abstract |Local file in Dropbox|

Reports that insurance and financial advisors in the United States have quantifiable data which illustrates that life settlements may not be an appropriate option for many clients in the United States Details of a life insurance settlement transaction; Assessment of life settlement transaction costs; Importance of estate planning.

Life Settlements: An Option for Seniors, an Opportunity for Investors

Ziser, Boris (2005) Journal of Structured Finance

Life settlements offer an uncorrelated investment opportunity with attractive yields, as well as an alternative to seniors of which they were not previously aware.
Abstract |Local file in Dropbox|

Over the past two years, the secondary market for life insurance policies, known as life settlements, has grown in the United States to a multi-billion dollar a year industry. Life settlement transactions have increased in volume and are likely to remain attractive due to the yields, the uncorrelated nature of the asset, and the flexibility available in structuring transactions that can accommodate investor preferences. Life settlements often can provide an alternative to seniors of which they were not previously aware. As the universe of parties that can facilitate life settlement transactions expands, more seniors will be presented with the possibility of doing a life settlement and the volume of transactions will increase. As the life settlement market continues to grow, the number of third-party service providers, such as verification agents and medical underwriters, is also likely to increase. The result will be a more robust and efficient market that will enable the participants to continue to benefit from this unique asset.

It’s Time To Ban IOLI

Piontek, Steve (2005) National Underwriter

Investor-owned life insurance, which moves far from the noble basis of protecting loved ones, inevitably cheapens the concept and should be banned.
Abstract |Local file in Dropbox|

It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners (NAIC) took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution. What is pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment. IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.

2006

Inside the Life Settlement Industry: An Institutional Investor’s Perspective

Seitel, Craig L. (2006) Journal of Structured Finance

Providers assess policies’ market value and assemble prime investment portfolios, while agents and brokers identify insureds wanting to sell their policies in the first place.
Abstract |Local file in Dropbox|

The life settlement industry offers a combination of challenges and opportunities for domestic and international investors in an uncorrelated asset class with promising returns. Although the life settlement supply chain is characterized by a variety of interdependent players including, financial planners, life settlement brokers, actuarial experts, verification agents, escrow agents and others, the provider’s role is the point at which the true economic value of the consumer’s life insurance policy is established through pricing and competitive bidding. New providers entering the marketplace can expect to face a variety of operational challenges from sourcing employees to sourcing product flow. This article explains the integral role of the provider through which institutional capital enters the marketplace, examines the challenges of attracting capital, and discusses the administrative issues involved in setting up shop.

Life Settlements Today: A Secret No More

Ziser, Boris (2006) Journal of Structured Finance

As the industry matures, a dramatic increase in life settlement securitization transactions is expected.
Abstract |Local file in Dropbox|

The life settlement market continued to expand in 2005. The expansion has led to an increase in the recognition of this asset class and more traditional lenders have begun to enter the market. Life settlement transactions can be complicated and require structuring expertise to address various issues, including tax and securities law issues. The market is waiting for securitization to become an available vehicle through which industry participants will be able to access the capital markets. As the life settlement market continues to develop and issues such as longevity risk are addressed, we should see an increase in life settlement securitization transactions.

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

The Case for Sunshine in the Life Settlement Industry

Balinsky, Adam (2006) Journal of Structured Finance

Accessibility of policies, transparency, market-making mechanics and bid-ask processes as well as alternative purchase structures are yet to be addressed by the life settlement industry.
Abstract |Local file in Dropbox|

The secondary market for life insurance policies continues to grow as a result of the positive value created through improved liquidity for an otherwise illiquid asset. While there are critics of the life settlement industry, market forces and property rights ensure that the phenomenon of individuals reselling their life insurance policies will persist. As the life settlement market matures there are several changes that must occur in order to reduce transaction costs, allowing greater market efficiency and ensuring sustainability of the industry. This article makes the case for greater transparency and reduced transaction costs within the industry in order to increase returns to sellers, thereby motivating additional sellers to consider disposing of their policies and unlocking underlying value.

The Life Settlement Market is an Opportunity

Bakos, Tom; Parankirinathan, Kiri (2006) Journal of Structured Finance

Insurers and reinsurers should participate in the life settlement market, through e.g. purchasing impaired policies as a hedge against the increased mortality risk, to drive an orderly and reasonable market development for the benefit of all involved including themselves.
Abstract |Local file in Dropbox|

Life settlements provide life insurance policy owners a viable alternative to surrendering the life policy. The authors address the misunderstandings of many early entrants regarding the inner workings of life insurance products, the terminology, and the applicability of certain actuarial assumptions. The authors point out that insurance companies, rather than portraying life settlement transactions as an attack on policyholder equity, ought to take more responsibility in creating a disciplined and orderly secondary market for life insurance policies that can benefit their policyholders. A mature life settlement market–with attention paid to consumer needs, a technically correct understanding of the risks, responsible pricing, and maintenance of high ethical standards–will thrive and every participant will be well served. Who is better equipped to do this than the insurance companies?

Risk Mitigation for Life Settlements

Perera, Nemo; Reeves, Brian (2006) Journal of Structured Finance

Although rating agency requirements and debt holder covenants mandate basic risk-transfer protocols to be utilized, savvy investors actively deploy sophisticated risk transfer mechanisms that combine equity and insurance, to exploit investment value in life insurance assets and create above-par returns.
Abstract |Local file in Dropbox|

Investors seeking new structures for acquiring policies in the life settlement market encounter several underlying risks unique to the asset class. Those risks, described in this article, include contestability risk, missing body risk, insurable interest risk, incorrect-purchase-price risk, life insurance company credit risk, cost-of-insurance risk, and longevity risk. Some risks can be easily mitigated, but others require more complicated risk transfer mechanisms that combine financial products with insurance products. These products range from contestability coverage to more sophisticated mortality risk transfer constructs that blend equity derivative products with property casualty insurance. As the life settlement market evolves, risk mitigation will play an increasing role in reducing volatility and enabling predictable returns to allow for more institutional capital participation. Knowledge about the risks and the available risk mitigation solutions becomes a must for prospective investors interested in entering into the life settlement market.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Pricing Death: Analyzing the Secondary Market for Life Insurance Policies and its Regulatory Environment

Kohli, Sachin (2006) Buffalo Law Review

Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest.
Abstract |Local file in Dropbox|

Life insurance and the way we have typically thought about life insurance will continue to change over the coming years. The early development of a secondary market for life insurance policies and the benefit it has brought policyholders and investors illustrates the want and need for this market. Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest. Given the proper legislative attention, the secondary market can become a great source of value to the everyday life insurance consumer even more so than it is today.

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Fasano, Michael V. (2006) National Underwriter

Life and life settlement industries have more to gain than to lose from each other.
Abstract |Local file in Dropbox|

The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate. A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity. The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other. Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together.

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Life Settlements: Product Flow, Opportunities and Constraints

McNealy, Sean; Frith, Marlene H. (2006) Journal of Structured Finance

In sizing up the life settlement marketplace, the lens that should matter most to those who are following the industry should be the perception of those on the receiving end of the product—senior consumers.
Abstract |Local file in Dropbox|

There is little doubt that the life settlement industry has taken a quantum leap forward over the past six years, and a variety of indicators point to the fact that the industry is poised for remarkable growth over the next few years. Public awareness and acceptance of the product has gained traction as thousands of seniors turn to the secondary market each year to maximize the value of their unwanted life insurance policies. In addition to the fact that institutional investors are fueling the product’s growth, most insiders agree that the marketplace is being propelled by a financially sophisticated, aging population, as they discover that an economically sensible exit strategy from unwanted life insurance policies does indeed exist. Although thousands of life settlement transactions are being sourced through agents, brokers, and providers, much of the market potential remains untapped due to product-flow constraints. Furthermore, approximately 80% of the policies presented to funders never make it to the cash register for various reasons. This article presents a general overview of the life settlement market, examines the dynamics and players involved in product flow, and identifies the main drivers and constraints in sourcing policies at the point of sale.

2007

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

Longevity Trading: Bridging the Gap Between the Insurance Markets and the Capital Markets

Dorr, David C. (2007) Journal of Structured Finance

Trading in life settlements and the future of the sector – a liquid life settlement market – requires standards to assist in the efficient transfer of risk and assets.
Abstract |Local file in Dropbox|

The recent ability to trade longevity risk through the use of life settlements, whether for speculation, investment, or as a hedge, has far reaching implications for the entire financial sector. Currently, there are two active markets that trade in life settlements: the secondary market and the tertiary market. The secondary life insurance market is where a life insurance policy first enters the marketplace. The tertiary market is where individual policies and portfolios of policies come back into the market and are among between financial institutions. By providing the industry with secure, business-to-business trading platforms specifically designed for life settlement transactions, online platforms address many of the inefficiencies and shortcomings currently facing this industry. Online exchanges lower the fixed costs associated with brokering, underwriting, and purchasing a life insurance policy and consequently provide the opportunity for smaller policies to be brokered in the secondary market. Electronic trading platforms provide the ideal solution to monitor, update, and report upon the requlatory requirements of both buyers and sellers. Transparency and disclosure is probably the most compelling justification for the use of electronic platforms. For securitization to develop and flourish, an electronic exchange will need to be in place to facilitate trades and transactions.

Vulture Capital Tax Manual-A Brief Guide to the Tax Issues Associated with Financial Investments in Life Settlements

Shapiro, David H. (2007) Journal of Taxation of Financial Products

A proper determination regarding the source (U.S. or foreign) of Sales Income and Death Benefit Income is a critical component of the U.S. tax analysis.
Abstract |Local file in Dropbox|

For several years, terminally ill individuals have been able to sell the entitlement to death benefits associated with their life insurance contracts to investors for cash. More recently, a market has developed that allows healthy individuals to sell their life insurance policies to investors for cash amounts exceed ing the policies cash surrender value. This practice has come to be known simply as the lifetime settlements of life insurance contracts. It would appear that life settlement investing is slowly emerging as a popular hedge fund strategy that is uncorrelated with other strategies and markets. State regulators have begun to focus their attention on these arrangements to help ensure that they are undertaken within certain parameters. Investors (and their tax advisors!) would similarly welcome clarity from the IRS with respect to the numerous tax issues involved. In the meantime, investors can only structure and manage their life settlement investments with careful attention paid to the uncertainty arising from the tax variables.

New Swaps to Hedge Alpha and Beta Longevity Risks of Life Settlement Pools

Mott, Antony R. (2007) Journal of Structured Finance

Whereas life settlements don’t always provide an obvious advantage to insurance companies, longevity derivatives do allow the insurance industry to identify, concentrate, and hedge the risks to insurers, perhaps more effectively than the insurers can do themselves.
Abstract |Local file in Dropbox|

The promise of high profits uncorrelated to the stock market draws prospective investors to life settlements. Spared perhaps from correlation risk, investors face other obvious and not-so-obvious risks including two types of longevity risk. The cost to hedge longevity risk has traditionally been exorbitant because those who take the other side are not themselves hedging. Newly engineered longevity swaps may provide lower cost hedging primarily because they are designed to place together two parties with opposite hedging needs.

The “Concept” of a Model Act: The NAIC’s Amended Viatical Settlements Model Act

Washington, Stephen L. (2007) Journal of Structured Finance

Assuming that the legislative framework will see a dispersion of laws and regulations governing life settlements, life settlement market participants should anticipate increased compliance requirements and associated costs.
Abstract |Local file in Dropbox|

The National Association of Insurance Commissioners (the “NAIC”) voted on June 4, 2007 to approve certain proposed amendments to its 2001 Viatical Settlements Model Act (the “Model Act”). The amendments contain a number of useful updates to the prior NAIC model act adopted in 2001 that are aimed at protecting consumers, while others, if ultimately adopted by state legislatures, would appear to be squarely aimed at stifling the rapidly developing life settlement market. While the NAIC voted to approve the proposed amendments as a new model act, it is unlikely that many states will adopt the new Model Act in its adopted form, in view of certain overreaching provisions that are contained in the model. Ironically, the amended Model Act most likely will result in a much greater diversification of life settlement statutes among states that regulate life settlements, rather than the national uniform standard that the NAIC had perhaps hoped would result from its efforts. Adding to the mixed response to the Model Act, the National Conference of Insurance Legislators (“NCOIL”), a non-governmental organization comprised of state legislators involved in insurance legislation, has been reviewing and revising its own model act governing life settlements.

Lurking Pitfalls: Due Diligence in Life Settlements Transactions

Freeman, M. Bryan (2007) Journal of Structured Finance

Most industry players acknowledge the obvious pitfalls of difficult-to-estimate life expectancies, yet some fail to perform institutional-quality underwriting (due diligence) on any number of obvious risk areas.
Abstract |Local file in Dropbox|

In the relatively young history of the secondary market for life insurance, a great deal of attention has focused on the due diligence necessary to adequately gauge life expectancies. Still, many investors overlook various other life settlement transaction risks that have potentially significant consequences, including assuring that policies owned by trusts are saleable and otherwise what they seem to be, adequately following the patchwork of vastly differing state laws and regulations, potential misuse of the accredited investor exemptions of settlement regulation, and more. Thoughtfully manage and eliminate life settlement transaction risk through stringent due diligence procedures. Otherwise, even the simplest aspects of such a transaction may prove to be ticking time bombs.

How Do the Privacy Laws and USA Patriot Act Apply to the Life Settlement Industry?

Casey, Brian T. (2007) Journal of Structured Finance

Several, but not necessarily all, privacy regulations apply to life settlement companies.
Abstract |Local file in Dropbox|

This article analyzes the application of the Gramm-Leach-Bliley Act, Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy laws, and the USA PATRIOT Act to the life settlement industry. The article further examines how the USA PATRIOT Act created anti-money laundering, suspicious activity reporting, and know-your-customer regulations that apply differently to various segments of the life settlement industry. In addition, the article examines the impact of modern financial and health privacy laws and how they impact insurance products that require disclosure of sensitive information from its customers.

Are Life Settlements a Security?

Casey, Brian T.; Sherman, Thomas D. (2007) Journal of Structured Finance

Life settlement, whether with fixed or variable underlying policies, may involve transaction of securities and hence be subject to security regulations; however, exemption can be achieved through proper structuring of the sale.
Abstract |Local file in Dropbox|

Given the extraordinary growth of the U.S. life settlement industry over the last decade, it is not surprising to find increased attention and scrutiny by academicians, the media and legal enforcement authorities–including, among others, state and federal securities regulatory and self-regulatory organizations. The securities laws regulators argue that investments in all forms of life settlement transactions involve the sale of securities, and that the full spectrum of securities laws applies. For the most part, they may be right. In discussing the pertinent securities-related issues surrounding life settlements, there are three fundamental questions to be addressed: 1) Does the sale of the life insurance policy to a passive investor that relies on others to conduct due diligence, price the policy, carry out the transaction, and perform follow-up services involve the sale of a”security" under the Securities Act of 1933, as amended (the “1933 Act”)? 2) Do the “registration” requirements under the 1933 Act apply? 3) Do sales activities in connection with the sale of the life insurance policy trigger any broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”)? This article concludes that the sale of the entire interest in an in-force life insurance policy to a passive investor may very well involve the sale of a security. The sale can be structured so that it is exempt from the registration requirements of state and federal laws. However, the state and federal anti-fraud provisions will apply to the transaction; and any person effecting the sale, particularly if compensated on the basis of the size of a successful sale, might be required to register with the SEC (and the applicable state) as a broker-dealer and be licensed as a security salesperson by the NASD.

STOLI on the Rocks: Why States Should Eliminate the Abusive Practice of Stranger-Owned Life Insurance

Mathews, Eryn (2007) Connecticut Insurance Law Journal

STOLI creates dangerous financial and legal risks for purchasers, investors and life insurance companies, and also raises serious ethical concerns.
Abstract |Local file in Dropbox|

The life insurance market is a burgeoning field of sophisticated investment transactions. A life insurance policy, traditionally an illiquid asset, has developed into an asset-backed security which has proved quite profitable to investors and insureds alike. These transactions allow insureds under certain circumstances to sell their policies to investors. The development of this secondary market has injected competition into the life insurance business and resulted in better products with more options for consumers.

The Return on a Pool of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2007) Journal of Structured Finance

As required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.
Abstract |Local file in Dropbox|

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

Life Settlement Transactions: Important Tax and Legal Issues to Consider

Magner, James C.; Leimberg, Stephan R. (2007) Estate Planning

Although the number of life settlement transactions has increased trmendously in recent years, there are still many significant and unresolved tax and legal issues that advisors and fiduciaries must consider.
Abstract |Local file in Dropbox|

Although the sale of a life insurance policy to a life settlement company would seem to be a relatively straightforward transaction, advisors and policy owners may be surprised at the number of documents buyers typically include in their closing package. Advisors will generally find that life settlement companies are unwilling to make substantive modifications to their documents, and there may be valid business reasons for this position. Even if changes are not accepted, there are a number of important issues the advisor should consider in the document review process. Advisors should complete a thorough credit check on the provider and funder, and ask whether the policy is being bought to be sold or to be held. Advisors, particularly those who sign the policy owner’s tax return, should not overlook the fact that life insurance contracts are unique assets subject to special tax rules. Also, loan interest should be carefully reviewed.

Inside the Life Settlement Industry: A Provider’s Reflections on the Challenges and Opportunities

Seitel, Craig L. (2007) Journal of Structured Finance

Industry maturation means shifting providers’ focus from managing the supply chain to creating a value chain.
Abstract |Local file in Dropbox|

As a portal to institutional investors and a gateway to settlement brokers, the provider plays a pivotal role in the secondary market supply chain. This article discusses key issues and challenges faced by providers in the current life settlements market. Attracting stable sources of financing is “job one” and critical to the success of a provider company. From the regulators’ and legislators’ perspective, a primary focus will center on transaction transparency and disclosure to the consumer of all commissions paid. Operational challenges include staying abreast of licensure and compliance issues, developing teams of highly skilled life settlement professionals, credentialing industry professionals, developing robust data analytics and data management capabilities, addressing privacy issues, conducting due diligence on investors, and educating novice brokers so as to better manage product flow. As the life settlements industry matures, sustaining the momentum will require a shift away from “managing the supply chain” to “creating a value chain” that emphasizes greater value and transparency to the consumer.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

2008

Virtues and Evils of Life Settlement

Breus, Alan (2008) Journal of Accountancy

Under the right conditions, sale of a life interest may be a good policy.
Abstract |Local file in Dropbox|

Life settlement, boosted by aggressive marketing, has developed into a major secondary market for existing life insurance policies. The rise of this now $15 billion annual market has brought with it fresh regulatory scrutiny to crack down on the parallel growth of stranger-originated life insurance (STOLI). Given the growing importance of this segment of the life insurance business, CPAs should understand how and when life settlement can be a good investment for clients as well as the possible tax implications and hazards.

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

A Life Settlement Mosaic

Katt, Peter C. (2008) Journal of Financial Planning

Most life settlement investments haven’t matured and profits are almost certainly an illusion.
Abstract |Local file in Dropbox|

The author’s life settlement views are formed from his experiences with clients. Since he is solicited by clients and not the other way around, he takes on what is brought to him. The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning. Almost all other possible life settlement situations should result in the policyowner retaining the policy – at least until the policy is near termination. The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. The appetite for doing life settlement transactions has become so great that the industry has convinced itself that life insurance is so mispriced that the policies of insureds in the same health are attractive targets as well.

6-Month Life Settlement Outlook: More Growth, More Regulation

Simon, Larry A. (2008) National Underwriter

A push for more uniform standards that effectively address STOLI and aim to stop fraud is expected, protecting both consumers and the professionals aiding seniors in financing planning goals.
Abstract |Local file in Dropbox|

The life settlement market will continue to expand and evolve in the second half of 2008. Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market. Since introduction of the National Conference of Insurance Legislators (NCOIL) and National Association of Insurance Commissioners (NAIC) model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry. This includes 5 bills based on the NAIC model and five based on the NCOIL model.

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

What Every CPA Should Know About Life Settlements

Bruno, Susan J. (2008) Journal of Accountancy

To obtain an ideal position to advise clients about life settlements, CPAs should understand the life settlement process and learn criteria for qualifying clients and life settlement companies.
Abstract |Local file in Dropbox|

For individuals 65 and older, a life insurance policy may represent an untapped asset that they are likely totally unaware of. Until recently, the owner of an unneeded or unwanted policy had two options: sell the policy back to the company that issued it for its cash surrender value or allow it to lapse. Now there’s a third and potentially better option in the secondary market, also known as life settlements. CPAs, especially personal financial specialists, are in an ideal position to advise clients about life settlements, but they must first understand the life settlement proposition. This article presents an outline of the process, followed by guidelines for who is a good candidate for life settlement and tips for getting the best price for the policy from a well-qualified settlement company.

Extending the Efficient Frontier through Life Settlements

Dorr, David C. (2008) Journal of Structured Finance

Non-correlation allows life settlements to push the efficient frontier, but not to be exempt from contraction in market liquidity.
Abstract |Local file in Dropbox|

With the increasing acceptance of life settlements as an established asset class, institutional investors have begun to take serious notice that life settlements offer an attractive advantage because of their low correlation to other asset classes. Indeed, since modern portfolio theory is largely based upon the diversification of assets with low or negative correlations, it follows that incorporating pools of life insurance or longevity-linked instruments into a portfolio of diverse assets can significantly enhance a portfolio’s performance. This article goes beyond this basic observation to explain why longevity and mortality-linked instruments will play an increasing role in the future development and construction of institutionally managed portfolios.

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Common Securities Law Questions in the Life Settlements and Life Insurance Premium Finance Industries

Casey, Brian T.; Sherman, Thomas D. (2008) Journal of Structured Finance

Whether a life insurance-linked contract is a security or not depends on contract properties plus the definition on securities from federal and states’ laws.
Abstract |Local file in Dropbox|

This article examines three securities-related questions frequently encountered in the life settlements, or secondary life insurance, and the life insurance premium finance markets: 1) Life insurance policy put or call agreement: Is it a security? 2) A fund that owns life-settlement-acquired life insurance policies of life insurance premium finance loans: Is it an investment company? 3) Life insurance premium finance loan: Is it a security? The questions are analyzed only under the federal securities laws, but a similar analysis would obtain under most states’ securities laws where they apply.

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Life Settlements: Pricing Challenges and Opportunities

Schwartz, Jesse M.; Wood, Timothy O. (2008) Journal of Structured Finance

In the case of life-settlement assets, the availability of these margins may be squeezed as a result of the high demand for investments uncorrelated to the performance of the economy.
Abstract |Local file in Dropbox|

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters’ assessment relative to the investors’ risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

Another Active Year in the Life Settlement Industry

Ziser, Boris (2008) Journal of Structured Finance

The life settlment market develops, despite uncertainties caused by judical activities, and lack of insurance product covering longevity risk which delays securitization.
Abstract |Local file in Dropbox|

In the past 12 months, there has been significant growth and regulatory and judicial activity in the life settlement industry. In addition to the 28 states that regulated life settlements a year ago, several additional states have either adopted life settlement laws or have proposed legislation that is pending. One common goal shared both by states that adopted new legislation and by those that revised existing legislation was the elimination of stranger-originated life insurance (STOLI). There are two categories of proposed and pending legislation: 1) legislation based on the Viatical Settlements Model Act, and 2) legislation based on the model legislation introduced by the National Conference of Insurance Legislators (NCOIL). On the structured finance front, the continued absence of a widely available and accepted insurance product covering the longevity risk inherent in life settlements, and the dislocation in the asset-backed market as a whole, have combined to further delay the eagerly awaited arrival of a pure, rated, life settlement securitization.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

The Transformation of Morals in Markets: Death, Benefits, and the Exchange of Life Insurance Policies

Quinn, Sarah (2008) American Journal of Sociology

The life insurance industry incubated specific technologies of commensuration, such as actuarial tables and contractual structures, as well as the notion that life insurance is not simply a rational phenomenon but also a moral one.
Abstract |Local file in Dropbox|

This article adopts an institutional approach to describe the changing secondary market for life insurance in the United States. Since the 1990s, this market, in which investors buy strangers’ life insurance policies, has grown in the face of considerable moral ambivalence. The author uses news reports and interviews to identify and describe three conceptions of this market: sacred revulsion, consumerist consolation, and rationalized reconciliation. Differences among the conceptions are considered in view of the institutional legacy of life insurance and its success in organizing practices, perceptions, and understandings about markets and death. From this case, the author draws implications for analyses of morals in markets, an important and emergent topic within economic sociology.

2009

Open Questions and Recent Guidance Regarding the Life Settlement Industry

Gelfond, Frederic J. (2009) Journal of Structured Finance

The life settlement industry lacks guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind.
Abstract |Local file in Dropbox|

Billions of dollars are being made available by investors from all over the world who are looking to participate in the life settlement industry. For investors who can develop reliable actuarial models and establish long-term business processes, this option presents a means of diversifying a portfolio with non-correlated assets. Despite the number of willing investors and the frequency with which these transactions are occurring, no “cookie cutter” transaction type, or business structure, is predominant in the industry. That is, there is a variety of participants in terms of form of entity, domestic and foreign locale, degrees of active participation in the operation of the “business,” sophistication and needs as to actuarial and business modeling, and expectations regarding buying and holding and securitizing the policies. Among the more significant drivers of this variation in structuring is a given investor’s identification and understanding of the numerous tax issues that are potentially involved. The problem, however, has been the apparent lack of guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind. In May 2009, the Internal Revenue Service released two revenue rulings (Revenue Ruling 2009-13 and Revenue Ruling 2009-14) that answer many of the questions that taxpayers have been asking in this area–or do they?

A Provider’s Reflection from Inside the Life Settlement Industry: Understanding the Chaotic Environment

Seitel, Craig L. (2009) Journal of Structured Finance

While many investors were hurt by life expectancy adjustments, new investors stand to benefit from the more conservative analysis.
Abstract |Local file in Dropbox|

Now nine years into its life cycle, the life settlement industry is no longer a fledgling, early-stage sector of the financial community. Regulated by 30 state insurance departments (including Puerto Rico) and, in part, the Financial Industry Regulatory Authority (FINRA), this industry has validated itself by creating a secondary market for life insurance policies to the benefit of consumers as well as an asset class for investors that is uncorrelated with the credit and investment risk of the typical money manager’s portfolio. That said, the second half of 2008 through 2009 thus far has proven to be the most challenging of times this industry has experienced. For reasons brought about by the global economy as well as reasons indigenous to this industry, the life settlement community finds itself in a state of chaos. This article reviews the reasons behind such turmoil and examines the confluence of external and internal forces resulting in this financial perfect storm. It also explores the potential remedies and other factors that provide hope that this industry will not only survive, but prevail, in the long run.

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

Has Longevity in the U.S. Peaked?

Dorr, David C. (2009) Journal of Structured Finance

Population increase, more expensive healthcare, decource depletion, lower quality food and declining wealth for seniors pull down longevity growth.
Abstract |Local file in Dropbox|

This article enumerates the five factors that influence longevity, with its attendant impact on the life settlement industry. We are at the apex of the longevity growth curve. It may increase slightly over the next 10 years, and then it will drop quite dramatically in the following years. As longevity declines, to the extent professional longevity estimates used by the life settlement industry are reduced at a slower rate than the actual changes in longevity, investors in life settlements may see opportunities to arbitrage those longevity estimates and increase their yields.

A Challenging Year in the Life Settlement Industry

Ziser, Boris (2009) Journal of Structured Finance

The life settlement market gradually recovers from the impact of the financial crisis and the extension of the life expectancies in the Fall of 2008.
Abstract |Local file in Dropbox|

The life settlement industry has not been immune to the effects of the financial crisis that has gripped the world in the last 12 months. Combined with shifting life expectancies and continuously developing legislation, the life settlement industry has had its share of challenges. New judicial decisions, however, have helped address certain issues relating to insurable interest, such as whether the intent of the insured is relevant in the analysis, which was a question raised in the widely publicized “Life Product Clearing” case. Furthermore, revenue rulings recently released by the IRS provided additional certainty with respect to the characterization of income in life settlement transactions. Although the economic environment continues to be challenging, as economies begin to recover and investors begin to invest their capital again, the uncorrelated nature of life settlements should continue to make them an attractive alternative asset class.

Taxation of Life Settlements for Policyholders and Investors: An Updated Primer

Casey, Brian T.; Brunt, Kirk Van (2009) Journal of Structured Finance

With the issuance of Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in May 2009, the IRS has provided answers to many of the relevant questions, but also raised new questions, relavent to policy buyers and sellers.
Abstract |Local file in Dropbox|

The taxation of life insurance is a subject encompassing a wide range of lengthy and complicated tax rules. Life settlements add an additional layer of difficulty. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Two recent revenue rulings issued by the Internal Revenue Service (IRS) both complicate and simplify this topic.

Implicit Options in Life Insurance: An Overview

Gatzert, Nadine (2009) Zeitschrift f{"{u}}r die gesamte Versicherungswissenschaft

A trend toward risk management systems based on the fair value concept offers
Abstract |Local file in Dropbox|

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. In this article, we first present the different contract designs in Europe and the United States and point out differences in the contract design. Second, a comprehensive overview and description of implicit options contained in these contracts is provided. With focus on participating contracts, we present contract design, valuation methods, and main results of several recent articles in this field. The study indicates that current developments regarding regulation (Solvency II, Swiss Solvency Test), accounting (IFRS), customer needs, and secondary life insurance markets may lead to a trend away from traditional contract design of participating policies and toward new products that are of a more transparent modular form such as variable annuities. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

The Life Settlement Industry Tests State Insurable Interest Rules

Kozol, George B. (2009) Journal of Financial Service Professionals

While this litigation may temporarily destabilize the life settlement business, the increase in supply of policies associated with the aging of the baby boomer generation and the increase in demand for uncorrelated assets will fuel stability and growth in the settlement business.
Abstract |Local file in Dropbox|

As world financial markets become more interdependent, the demand for uncorrelated investments continues to increase. Institutional investors and sophisticated individual investors are searching for investment returns that are not linked to bonds, equities, or commodities. In the late 1990s investment bankers and hedge fund investment managers turned to the secondary market for life insurance to create such an investment class-life settlement-backed securities. The demand for the new securities had been so great, prior to the financial crisis that began last fall, that syndicators and promoters required amounts of life insurance on older-age individuals that exceeded the supply available through normal functioning of the secondary market. The unprecedented demand for life policies on older-aged individuals produced life insurance applications and arrangements that tested the boundaries of state insurable interest laws. This article will explain the tension between life settlement-backed securities and state insurable interest laws. The article also will overview regulatory developments that should assuage this tension.

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

The Supply and Demand for Life Settlement Contracts

Stone, Charles Austin (2009) Journal of Structured Finance

Life settlement market becomes efficient through an increase in the elasticity of both the supply and demand curves, positively related to the liquidity, transparency, and integrity of the market.
Abstract |Local file in Dropbox|

In this article the author discusses the implications the financial crisis and recession have had and will have on the market for senior life settlements. At first glance the financial crisis should actually spur the growth of the market in senior life settlements. This is because on the supply side of the market significant amounts of wealth of senior citizens have been lost in the stock, bond, and real estate markets. On the other hand, factors on the demand side of the market have reduced the offered prices for life insurance policies. Interestingly, the most dramatic event that impacted the life settlements market as the financial markets entered the crisis stage in the autumn of 2008, was the decision by the directors of 21st Services to revise their mortality tables. The author concludes that the element that creates a sustainable market in life settlements is the increased transparency of pricing on both sides of the market.

Taxation of Life Settlements–Unanswered Questions After Rev. Ruls. 2009-13 and 2009-14

Keligian, David L.; Larsen, Robert W. (2009) Journal of Taxation

While recognizing that Section 72(e) does not address the character of income recognized, the IRS has concluded that such income always must be taxed as ordinary income, even if the policy owner had solely an investment intent with respect to the policy.
Abstract |Local file in Dropbox|

For the most part, the Service’s answer to the question, “what is the tax treatment of the proceeds of a life settlement transaction?,” will be “ordinary income.” Given the lack of useful precedent, the IRS seems to have chosen the result that provides the most amount of revenue, despite the fact that at least some purchasers of such life insurance would appear to have an investment motive entitling them to capital gains treatment.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

2010

Does Revenue Ruling 2009-13 Sound the Death Knell for Life Settlements?

Elder, Jack E. (2010) Journal of Financial Service Professionals

Revenue Ruling 2009-13 reduces the basis in a permanent life insurance contract by an amount equal to the cost of insurance protection, which, in policies with little or no cash value, is basically all the premiums.
Abstract |Local file in Dropbox|

There are a multitude of reasons why a family may no longer need an existing life insurance policy to meet their estate planning goals. In such cases, the policyowner might consider selling the policy for cash to an unrelated third party in the life insurance settlement market rather than allowing it to lapse. However, the IRS recently issued two revenue rulings that have dramatically impacted the life settlement market by increasing the income tax consequences to the sellers upon the sale of life insurance policies. This article provides a summary and an analysis of the examples set forth in Revenue Ruling 2009-13, which addresses the tax results as they relate to the policyowner/seller of a life insurance policy. Additionally, this article tackles the tax consequences of defaulting on a loan for a premium financed policy.

Life Settlements from the Perspective of Institutional, Real Options, and Stewardship Theories

Dibrell, Clay (2010) Family Business Review

Institutional theory provides a broader perspective on the potential endemic risks associated with the life settlement industry, as it strives to attain legitimacy; real options theory helps predict the outcome of a succession event, which reduces the uncertainty associated with succession to external and internal life settlement stakeholders; stewardship theory suggests life settlements would be a significant financial vehicle, enabling the steward of the firm to maximize his or her utility through extrinsic and intrinsic rewards.
Abstract |Local file in Dropbox|

As families seek alternative forms of financial capital without putting the family business at risk, life settlements are gaining the interest of family businesses and scholars. This commentary draws upon institutional theory, real options theory, and stewardship theory to provide a foundation to better understand life settlements and to complement the work articulated by Adams.

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Gatzert, Nadine (2010) Risk Management and Insurance Review

In the U.S., where policies of individuals above age 65 with reduced life expectancy are traded, while in the U.K. and Germany, with-profits and participating endowment policies with a fixed term are traded.
Abstract |Local file in Dropbox|

In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S.market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market’s unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.

Stranger Originated Life Insurance: Finding a Modern Cure for an Age-Old Problem

Fleisher, Maria (2010) Cumberland Law Review

Because of all of the risks involved, it is important that all states craft laws that will operate to eradicate harmful STOLI transac- tions, yet provide protection for seniors’ rights to participate in the legitimate life settlement market.
Abstract |Local file in Dropbox|

“There’s no reason to be the richest man in the cemetery. You can’t do any business from there.” - Colonel Sanders

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Betting on the Lives of Strangers: Life Settlements, STOLI, and Securitization

Martin, Susan Lorde (2010) University of Pennsylvania Journal of Business Law

Life insurance companies should reconsider the amount they pay out in surrender value so that life settlement offers would not look so attractive.
Abstract |Local file in Dropbox|

Life insurance serves the important purpose of providing a means for families and businesses to survive the premature death of a person whose support they require to maintain themselves. Over time, life insurance has become a much more sophisticated financial product incorporating savings plans, mutual fund investments, and securitizations. This article recounts the history of lfe insurance including the development of the insurable interest doctrine. It describes life settlements, especially strangeroriginated life insurance (STOLI) policies, which represent a particular abuse of the purpose of life insurance. The article discusses the securitization of pools of life insurance policies, reminiscent of the securitization of sub-prime mortgages. Then state and federal attempts at regulation and a variety of lawsuits are summarized. The article concludes that life insurance is such an important protection for families and businesses that its availability for its primary purpose should not be compromised by becoming the basis for complicated, misunderstood, and, in some cases, fraudulent financial products.

NCOIL Advances Life Settlement Disclosure Model

Thomas, Trevor (2010) National Underwriter

The Life Insurance and Financial Planning Commitee of the National Conference of Insurance Legislators (NCOIL) voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions.
Abstract |Local file in Dropbox|

A group of state lawmakers is proposing imposing a requirement on life insurers to tell policy owners that life settlements are an alternative to surrendering their policies. The Life Insurance and Financial Planning Committee of the National Conference of Insurance Legislators (NCOIL), Troy, NY, is drafting model state legislation to require life insurers to list life settlements as one of the options policy owners have when considering cashing in or lapsing their policies. In another development, NCOIL’s Life Insurance and Financial Planning Committee voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions (STAT).

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

An Update on the Life Settlement Industry: Recent Challenges and Tasks Ahead

Seitel, Craig L. (2010) Journal of Structured Finance

Regulation in the form of FINRA and the SEC helps validate the life settlement industry, now lacking liquidity, and should create a greater comfort level for potential investors.
Abstract |Local file in Dropbox|

Now more than 10 years into its life cycle, the life settlement industry is facing challenges whose outcomes will determine its very existence. This industry experienced robust and even exponential growth during the first decade of the new millennium. Its vitality and prospects for future growth are in question today. That said, the underlying fundamentals of this industry from an investor’s perspective remain economically sound and compelling. This article reviews the current state of the life settlement industry and explores the ongoing economic impact resulting from the financial crisis, regulatory developments, and industry dynamics. It also explores various future scenarios and potential outcomes as the industry continues to evolve.

Regulating the Secondary Market for Life Insurance: Promoting Consistency To Maximize Utility

Heady, Jared (2010) Rutgers Law Review

NA
Abstract |Local file in Dropbox|

A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.

2011

Regulation Not Prohibition: The Comparative Case Against the Insurable Interest Doctrine

Atmeh, Sharo Michael (2011) Northwestern Journal of International Law & Business

NA
Abstract |Local file in Dropbox|

American law requires an insurable interest—a pecuniary or affective stake in the subject of an insurance policy—as a predicate to properly obtaining insurance. In theory, the rule prevents both wagering on individual lives and moral hazard. In practice, the doctrine is avoided by complex insurance transaction structuring to effectuate both origination and transfers of insurance by individuals without an insurable interest. This paper argues that it is time to abandon the insurable interest doctrine. As both the English and Australian experiences indicate, elimination of the insurable interest doctrine will have little detrimental pecuniary effect on the insurance industry, while freeing consumers considerably. Indeed, New York comes to the brink of eliminating the doctrine in its recent decision in Kramer v. Phoenix Life Insurance Co. by sanctioning an immediate life insurance assignment procedure that in effect eliminates the need for an insurable interest in the assignee. However, Delaware, in PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust and Lincoln National Life Insurance Co. v. Joseph Schlanger 2006 Insurance Trust, breathes new life into an old doctrine. Overall, though, adhering to an arcane doctrine that prevents the value of an insurance policy from being realized without extreme legal burden both hampers the market and harms consumers, as the benefits of such transactions are both lessened by transaction costs and accrue to only a select few individuals.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

A Complex Game: The Life Settlement Process

Katt, Peter C. (2011) Journal of Financial Planning

Even if a policy seller knows who will initially own the policy, it is almost certain that policies will change hands several times before the insured passes.
Abstract |Local file in Dropbox|

This article provides details of a life settlement case the author dealt with last year. The author has worked with Mark for 10 years managing three $2 million UL policies insuring him that are owned by an irrevocable trust. Mark, now 80, has been in poor health since the author’s work began with him. The insurance company involved, AB Life, has only fair financial strength ratings that have been declining. Mark’s life insurance is viewed as other investments he has, thus the logic of wishing to pursue selling some of his policies to diversify his perceived risk with AB Life. Mark noticed an ad from a local agent promising results, so he called the agent. The agent hooked up with a settlement broker and they were very lucky that during this period a buyer for AB Life did emerge. This wasn’t lucky for Mark because this meant large commissions would be subtracted from the purchase price.

Coventry Wins Big Against Hancock

Hersch, Warren S. (2011) National Underwriter

NA
Abstract |Local file in Dropbox|

The article discusses the decision of officers of the State Insurance Department in the case of Coventry First LLC against John Hancock Life insurance Co. USA that could affect the life settlements involving conversions of term life insurance policies in New York.

New Value in Old Policies

Alexander, Neil (2011) Journal of Accountancy

Clients can recover significant wealth that may betrapped in unneeded life insurance.
Abstract |Local file in Dropbox|

Many clients have life insurance policies they view as unnecessary because they no longer meet their original need. As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. JE McGowan Consulting estimates the potential secondary market for life insurance policies exceeds $18 billion annually. Before clients abandon old policies, CPAs should step in and help them recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. CPAs can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket. Determining if selling a policy is a good idea is a relatively easy process for CPAs – and potentially lucrative for policyholders.

On Life Settlement Pricing

Erkmen, Bilkan (2011) Michigan Journal of Business

Besides technical precision, one should not ignore the role of psychological factors in the development of the life settlement industry.
Abstract |Local file in Dropbox|

Although life settlements as financial products have been in existence and active use in financial markets for quite some time, their pricing has never reached the level of transparency and standardization envisioned by Wall Street. This lack of standardization has been and still is the major roadblock against widespread use of life settlements as investment, diversication and portfolio risk management tools. However, the recent crisis of 2007 has revealed high levels of correlation among existing financial instruments that are in widespread use. This revelation raised an avid interest in new financial instruments that show low correlation to strong market swings. In this respect, life settlements and related products such as death bonds have gained popularity among practitioners and academics alike. This paper proposes a standard pricing framework for life settlements that is consistent with existing methods of risk management and sensitivity analysis widely used in fixed income products.

Regulating All Life Settlements as Securities: The New Age of the Life Settlement Investment Market

Casey, Brian T.; Lowe, J.D. Jeffrey D. (2011) Journal of Structured Finance

Although the Life Settlements Task Force recommendations have merit and have gained momentum with the SEC and some members of Congress, it is unlikely to see a modification to the definition of “security” to include life settlements in the very near future.
Abstract |Local file in Dropbox|

The life settlement investment market (“LSIM”) has been characterized as a “wild west” type investment environment over the course of the last decade. With very little federal oversight, the market flourished during the late ’90s during the viatical settlement era and well into the 2000s in the form of the life settlement market. The financial meltdown that gripped the United States in late 2007 and continues today has garnered a call to action for the federal government to enact legislation to protect investors from abuses apparent in the investment community. It appears now that the legislative call to action may formally make its way into the LSIM. The Life Settlements Task Force (“LSTF”), created by the Securities and Exchange Commission (“SEC”) in August 2009, was established to investigate and examine issues in the LSIM and to advise the SEC whether market practices in and regulatory oversight of the LSIM could be improved. This article outlines the basic findings of the LSTF as well as detailing the potential repercussions of the federal government acting upon those recommendations.

The Life Settlement Industry Today

Ziser, Boris (2011) Journal of Structured Finance

The improved regulatory landscape, combined with prior owners unable to keep policies in force due to distress caused by credit crunch, has created new opportunities for portfolio purchasers.
Abstract |Local file in Dropbox|

Having survived the credit crisis, extensive regulatory changes, and the negative press, the life settlement industry is still standing. With investors having found a new appreciation for uncorrelated investments, life settlements are emerging as a sensible part of an institutional investor’s portfolio. The frenzied pace of regulatory changes we saw over the course of the last several years has abated, as most states have either adopted new life settlement laws or amended their existing laws. In 2010 the U.S. Securities and Exchange Commission organized a Life Settlement Task Force to examine the business and made a key recommendation to amend the definition of a “security” to include all life settlements. Judicial activity continued in 2010 on issues such as an insurance company’s claim that insurable interest was lacking at the time a policy was issued and allegations of fraud. Portfolio sales are among the most active segments of the life settlement market today.

2012

Investing with the Grim Reaper: Insurable Interest and Assignment in Life Insurance

Richmond, Douglas R. (2012) Tort Trial & Insurance Practice Law Journal

NA
Abstract |Local file in Dropbox|

Stranger-owned life insurance, commonly known by the acronym STOLI, has for several years been a key practice of the so-called life settlements industry. STOLI generally describes the purchase of life insurance by an insured with the intent of assigning ownership of the policy along with its death benefits to investors who do not have an insurable interest in the insured’s life. State statutes regulating STOLI arrangements often define STOLI in this way. This is not a perfect description or definition of STOLI, however, because life settlement companies may purchase life insurance policies from individuals over the age of 65 who have remaining life expectancies of six to twelve years (although in some instances people with longer life expectancies may be considered), but who did not originally purchase their policies with the intent to transfer ownership of them to strangers. Insureds in this second category may seek to sell their policies because of shifts in personal financial preferences or due to changes in their circumstances, such as disability, divorce, retirement, or various forms of financial distress. This is still strangerowned life insurance, even if the original intent to transfer policy ownership is missing. […]of these differences, and while the mechanics of STOLI transactions may vary-they commonly involve major cash payments to insureds by intermediaries or investors, the formation of irrevocable life insurance trusts, and premium financing, among other techniques9- STOLI is unquestionably more an investment vehicle than an insurance transaction. The basic concept is that the life settlement company that purchases the policy will pay the insured an amount greater than the cash surrender value of the policy but much less than the death benefit, will thereafter keep the policy in force until the insured dies, and will then profit by collecting the difference between the death benefit and the combination of the sum paid to the insured and the premiums paid to keep the policy in force.11 Life settlements may be securitized, such that investors who purchase the resulting bonds profit in essentially the same fashion.

The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility

Stone, Charles Austin; Zissu, Anne (2012) Journal of Structured Finance

Compared to the deterministic model, the probabilistic and the stochastic valuation models diminish the need for a liquidity facility, because they project higher cash flows earlier on.
Abstract |Local file in Dropbox|

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Betting on Death or Just Cashing In?: Taking a Look at the Life Settlement Industry Through the Lens of Kramer v. Phoenix Life Insurance

Brunau, Terence John (2012) Quinnipiac Probate Law Journal

The challenge is to create a set of laws that prevent investors from coercively betting on death at the expense of defenseless policy holders, but which also allow people to just cash in.
Abstract |Local file in Dropbox|

The article presents information on the Stranger Originated Life Insurance (STOLI) transactions with reference to the trial of Kramer v. Phoenix Life Insurance Co. It discusses the insurance law of New York based on selling of life insurance policies to strangers. It further focuses on the origin of STOLI and the decisions of the New York Court of Appeals. It also discusses the need of precise regulations for protecting legitimate life settlements.

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

2013

Long Live Life Settlements: The Current Status and Proposed Direction of the Life Settlement Market

Koutnik, Michael (2013) Marquette Law Review

Coupling a strict judicial adherence to incontestability clauses with state codification of a five-year holding period on newly issued policies would help stabilize the market by providing certainty to investors of validly settled policies while at the same time reducing the financial benefit offered by STOLI transactions.
Abstract |Local file in Dropbox|

The payment of life insurance policy benefits to the insured’s suriving spouse or child is something with which most people are both familiar and comfortable. However, when those benefits are instead paid to a third party investor who has no interest in the insured’s life, some people cry foul. Yet this is the basic premise of the secondary market for life insurance. In this market, insured individuals assign their policy benefits to an investor who agrees to pay the insured a lump sum of money in addition to assuming responsibility for the policy’s premiums. While the underlying concepts that support the secondary market for life insurance policies are not new, the young and imperfectly regulated market has been strained by an increase in supply and demand for these products. Because of the limited guidance within the market, fraud and uncertainty have pervaded many transactions. As a result, many validly settled policies may face challenges in the courts. In an effort to help stabilize and legitimize the secondary market, this Comment recommends coupling a strict judicial interpretation of the incontestability periods contained in many life insurance policies with a five year holding period on newly issued life insurance policies. This framework will help deter fraudulent transactions while promoting certainty among investors.

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Coherent Pricing of Life Settlements under Asymmetric Information

Zhu, Nan; Bauer, Daniel (2013) Journal of Risk and Insurance

Policyholders’ adverse selection, resulting from asymmetric information, can explain the dicrepancy between expected and realized return.
Abstract |Local file in Dropbox|

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the “unique risks” within life settlements as recently discussed in the financial press.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

2014

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Lessons from the World of Micro Longevity

Sheridan, Matthew (2014) Pension and Longevity Risk Transfer for Institutional Investors

Life settlements provide useful, real-world lessons – such as awareness of informational asymmetries and the use of big data techniques – in managing longevity risk, many of which are applicable to the developing macro-longevity markets.
Abstract |Local file in Dropbox|

The pension risk transfer market has a bottleneck in its inability to attract sufficient institutional investor interest as longevity risk takers. Having spent many years at a large institution as part of a team investing directly in longevity risk via the life settlements market, the author encountered many of the challenges of managing this nascent risk type. The pension risk transfer market often seems at pains to distance itself from its life settlements cousin; however, in many ways “longevity is longevity” and the experience of dealing with the challenges in life settlements can offer valuable insights to investors across the full spectrum of the risk class. The article is aimed at capital markets investors considering longevity as an investable asset. It offers a discussion of the current perception of longevity risk, as well as a list of hints and warnings derived from direct market experience.

Life Settlements: The Death Wish Industry

Martin, Susan Lorde (2014) Syracuse Law Review

There is nothing to be gained by turning life insurance into a financial product that creates wealth for financiers who merely move money around, perverting the purpose of life insurance.
Abstract |Local file in Dropbox|

… So, the industry shifted to buying life insurance policies insuring the lives of people with other terminal illnesses; then, to buying policies of old people who were not terminally ill; then, to encouraging older people to buy insurance policies for the express purpose of selling them to investors; and finally, to bundling those policies together, securitizing them, and selling pieces of the bundles to investors. … On his application, Rucker said the policy was not going to be transferred to investors, and investors were not going to pay the policy premiums. … The court noted that incontestability clauses operate as statutes of limitations that keep insurance companies from continuing to collect premiums and reap profits until they have to pay out on policies, which they will refuse to do by claiming fraud or lack of insurable interest. … As in most of them, the new Arizona statute provides that insureds may not enter into life settlement contracts within two years of the issuance of policies, with exceptions similar to those in the New York statute. … Arizona’s statute suggests legislators there, like legislators in almost all other states with similar statutes, had a great deal of concern about promoters of life settlement agreements engaging in fraud and encouraging insureds and investors to enter into transactions that were not appropriate for them. … States became more amenable to various gambling enterprises because they were a source of revenue for the government. … Although life insurance companies oppose life settlements, they also provide the policies for those arrangements by encouraging consumers to purchase whole life policies (and their variants) instead of term insurance. … Other risks for investors in life settlement funds include: liquidity risk because cash outflows to pay premiums and fund redemptions occur regularly, whereas cash inflows from death benefits and new investments are unpredictable; policy availability risk; operational risks including litigation that can cost more than the death benefits; credit risk caused by the possible failure of the insurance carriers that underwrite the policies; and regulation risk because of changes in state and federal laws.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

2015

Wagering on the Lives of Strangers: The Insurable Interest Requirement in the Life Insurance Secondary Market

Swisher, Peter N. (2015) Tort Trial & Insurance Practice Law Journal

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Abstract |Local file in Dropbox|

The purpose of this article is to explore and analyze the crucial inter- relationship and the present tension existing between various life settlement alternatives and the insurable interest requirement for life insurance. Does the 240-year-old insurable interest doctrine adequately meet the needs of a modern society in recognizing a secondary market for life in- surance? If so, what additional remedies, if any, are available to both the insured and the insurer to legally protect the contractual rights and reasonable expectations of the parties?

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

2017

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

MacMinn, Richard D.; Zhu, Nan (2017) Journal of Risk and Insurance

Conventional longevity forwards exhibit relatively inferior performance in terms of hedging due to the nonnegligible basis risk between the general population and the settled subgroup, whereas biomedical research-backed obligations overcome this issue by providing returns that are strongly positively correlated with the specific longevity shock.
Abstract |Local file in Dropbox|

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument–the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

2018

Predicting Longevity: An Analysis of Potential Alternatives to Life Expectancy Reports

Xu, Jiahua; Hoesch, Adrian (2018) Journal of Retirement

A predictive model combining advances in information and communication technology with innovation in medical science is able to overcome shortcomings of traditional LE reports, such as falsification and inaccuracy as well as low productivity.
Abstract |Local file in Dropbox|

Retirees, pension funds, and the insurance industry have all been negatively affected by the wrongful estimation of longevity. The inaccuracies in current life expectancy (LE) reports primarily result from misinterpretations of the influence of resilience factors on longevity. This study examines different and more accurate measurement metrics to minimize the risks related to biased LE calculations. By using both qualitative and quantitative research approaches, this research develops a new conceptual model: a two-factor-LE-analysis model with a telomere test as a medical basis (physiological factors) and a big data approach to filter the psychological factors to longevity. The authors suggest that the new model, together with the insights of the existing LE-projection methodologies, has considerable potential to improve LE predictions.

By journal

Tally

caption — journal: no. of articles (rank)

Advisor Today

Keeping a Policy

Jones, Lucretia DiSanto (2005) Advisor Today

A lot of estate value is destroyed through sale of a life insurance contract.
Abstract |Local file in Dropbox|

Reports that insurance and financial advisors in the United States have quantifiable data which illustrates that life settlements may not be an appropriate option for many clients in the United States Details of a life insurance settlement transaction; Assessment of life settlement transaction costs; Importance of estate planning.

American Economic Review

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

American Journal of Sociology

The Transformation of Morals in Markets: Death, Benefits, and the Exchange of Life Insurance Policies

Quinn, Sarah (2008) American Journal of Sociology

The life insurance industry incubated specific technologies of commensuration, such as actuarial tables and contractual structures, as well as the notion that life insurance is not simply a rational phenomenon but also a moral one.
Abstract |Local file in Dropbox|

This article adopts an institutional approach to describe the changing secondary market for life insurance in the United States. Since the 1990s, this market, in which investors buy strangers’ life insurance policies, has grown in the face of considerable moral ambivalence. The author uses news reports and interviews to identify and describe three conceptions of this market: sacred revulsion, consumerist consolation, and rationalized reconciliation. Differences among the conceptions are considered in view of the institutional legacy of life insurance and its success in organizing practices, perceptions, and understandings about markets and death. From this case, the author draws implications for analyses of morals in markets, an important and emergent topic within economic sociology.

Applied Financial Economics Letters

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

Asia-Pacific Journal of Risk and Insurance

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

Banking Law Journal

Life Settlements and Trust Accounts: A Possible Modification of the Trustee’s Responsibility?

Miller, Dean Edward (2002) Banking Law Journal

In case where a substantial portion of the assets of a trust is an unmatured life policy, a trustee subject to the Uniform Prudent Investor Act must consider whether it is oblidged, by its fiduciray duty, to seek a buyer for that policy.
Abstract |Local file in Dropbox|

According to the author, developing trust law may now impose new duties upon the trustees of trusts holding life insurance policies; one salient cause of this development of trust law is the emergence of the life settlement. This would seem to mean, at the least, that in numerous instances a bank or trust company serving as trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement.

Buffalo Law Review

Pricing Death: Analyzing the Secondary Market for Life Insurance Policies and its Regulatory Environment

Kohli, Sachin (2006) Buffalo Law Review

Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest.
Abstract |Local file in Dropbox|

Life insurance and the way we have typically thought about life insurance will continue to change over the coming years. The early development of a secondary market for life insurance policies and the benefit it has brought policyholders and investors illustrates the want and need for this market. Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest. Given the proper legislative attention, the secondary market can become a great source of value to the everyday life insurance consumer even more so than it is today.

Connecticut Insurance Law Journal

The Death of Death Futures - The Effects of the Health Insurance Portability and Accountability Act of 1996 on the Insurance and Viatical Settlement Industries

Spurrier, Andrew (1997) Connecticut Insurance Law Journal

The HIPAA has given the viatical settlement industry a measure of legitimacy it has historically lacked; the full effect of federal recognition on viatical settlement providers remains to be seen.
Abstract |Local file in Dropbox|

As the viatical settlement industry developed, insurance companies began to respond to the needs of dying insureds by providing accelerated death benefit provisions and riders as part of life insurance coverage. The insured is paid the present, or “discounted,” amount of the death benefit, the viatical settlement provider using the same method that an insurance company might use. In most situations, the viatical settlement provider, now the owner of the insurance policy, assumes the costs and benefits of maintaining the policy: paying premiums to prevent the policy from lapsing, collecting dividends, and receiving the insured’s death benefit when death occurs. A viator’s sale or assignment of an insurance policy to a qualified viatical settlement provider must be of a life insurance contract. E. Failure to tender the viatical settlement by the date disclosed to the viator renders the contract null and void. Further Federal regulation of the viatical settlement industry may ultimately arise due to the increased scrutiny of the industry by the Securities and Exchange Commission (“SEC”), especially in the wake of new viatical settlement provider investment strategies and outbreaks of broker malfeasance.

STOLI on the Rocks: Why States Should Eliminate the Abusive Practice of Stranger-Owned Life Insurance

Mathews, Eryn (2007) Connecticut Insurance Law Journal

STOLI creates dangerous financial and legal risks for purchasers, investors and life insurance companies, and also raises serious ethical concerns.
Abstract |Local file in Dropbox|

The life insurance market is a burgeoning field of sophisticated investment transactions. A life insurance policy, traditionally an illiquid asset, has developed into an asset-backed security which has proved quite profitable to investors and insureds alike. These transactions allow insureds under certain circumstances to sell their policies to investors. The development of this secondary market has injected competition into the life insurance business and resulted in better products with more options for consumers.

CPA Journal

Using Life Settlements to Tap the Value of Hidden Assets

Friedman, Lori (2004) CPA Journal

In select circumstances, life settlements provide a win-win way to receive value in excess of the simple cash value of a policy, while gaining a tax advantage and putting more cash into a business, an acquisition, or an individual’s retirement.
Abstract |Local file in Dropbox|

In the past, the owner of a life insurance policy who no longer wanted to retain the contract had two options: allow it to lapse or surrender the policy. A new option can tap the hidden value of these policies. Under the right circumstances, life settlements provide value in excess of the cash value built up within these policies. In many respects, it works like found money for a company or individuals who might otherwise simply walk away from a policy rather than continue to pay premiums.

CPAs and Life Settlements: Due Care, Competence, and Objectivity

Roth, Ronald M (2004) CPA Journal

A life settlement can remove the policy from the taxable estate, avoiding application of the three-year rule under IRC section 2035, in order to transfer additional assets tax-free to descendents.
Abstract |Local file in Dropbox|

In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products.

Life Settlements: An Insurance Planning Tool

Greenberg, Valerie (2004) CPA Journal

Ideal institutional funders are not self-creared companies or trusts that hold investment capital, but world-recognized financial institution who can provide safeguards for advisors and clients.
Abstract |Local file in Dropbox|

Life settlements are a new insurance planning tool for older individuals in which a third party, preferably institutionally funded, purchases a senior’s existing life insurance policy for more than its cash surrender value (CSV). Life settlements are especially valuable when used for trustees. Life expectancy on life settlements can be up to 15 years. When looking at existing life insurance policies, the following situations may be possibilities for life settlements: business succession, trust administration, estate or financial planning, commercial lending, bankruptcy, divorce, charitable giving, and discontinued employee or executive retirement programs. A policy carried on the books as “no value” and ready to be dropped may turn out to be worth a great deal in a life settlement. Other types of policies that can be purchased include term, universal, whole life, variable, and group. Policies can be owned by individuals, trusts, and companies.

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

Cumberland Law Review

Stranger Originated Life Insurance: Finding a Modern Cure for an Age-Old Problem

Fleisher, Maria (2010) Cumberland Law Review

Because of all of the risks involved, it is important that all states craft laws that will operate to eradicate harmful STOLI transac- tions, yet provide protection for seniors’ rights to participate in the legitimate life settlement market.
Abstract |Local file in Dropbox|

“There’s no reason to be the richest man in the cemetery. You can’t do any business from there.” - Colonel Sanders

DePaul Journal of Health Care Law

Viatical Settlement and Accelerated Death Benefit Law: Helping Terminal, but Not Chronically Ill Patients

Eremia, Alexander D. (1997) DePaul Journal of Health Care Law

Because it is generally too difficult to determine the life expectancy of a chronically ill person, it is unlikely that VSPs will viaticate or insurance companies will accelerate the policies of such individuals.
Abstract |Local file in Dropbox|

Even those with health insurance often find their coverage insufficient to pay for all necessary medical expenses. In an effort to ease the financial burdens imposed on the terminally or chronically ill, the Health Insurance Portability and Accountability Act of 1996 (HPAA) was amended. As such, a chronically ill individual is one who has been certified by a licensed health care practitioner, within the preceding twelve month period, as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least ninety days due to a loss of functional capacity. An individual may also be deemed chronically ill if she is certified by a licensed health care practitioner within the preceding twelve month period as having a level of disability similar to the level of disability described above, or requiring substantial supervision to protect such an individual from threats to health and safety due to severe cognitive impairment. To reduce the burdens imposed on the government and the family of a chronically ill individual, tax incentives which encourage home health care could be provided to relatives or guardians of the chronically ill individual.

Elder Law Journal

You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly

Perez, Jessica Maria (2002) Elder Law Journal

Despite criticism associated with the viatical industry of the 1990s, the senior settlement industry of the new millennium is a modern and improved system, providing the elderly with a viable financial alternative for long-term care.
Abstract |Local file in Dropbox|

As seniors struggle to keep pace with medical care costs and other expenses, many must look to alternative sources of financial freedom. Senior settlement agreements, through which a senior may sell her life insurance policy to a third party for a percentage of its future value, may provide one such alternative. In this Note, Jessica Maria Perez explores the history of senior settlement agreements from their birth as sisters to similar agreements made by the chronically ill, to the present in which they are increasingly entered into by healthy seniors. Perez analyzes the positive and negative aspects of these agreements from basic economic risk to ethical issues to tax implications. She analyzes recent regulatory developments in this area, including the Viatical Settlements Model Act and various state statutes. Perez recommends increased regulation at the state level, encouraging states to adopt the Model Act. She also recommends that these transactions be made tax-exempt and that attorneys play a greater role in the making of senior settlements. With these reforms, Perez suggests that the senior settlement agreement can be a safe and effective method by which seniors can realize financial freedom.

Estate Planning

Stranger-Owned Life Insurance (‘SOLI’): Killing the Goose That Lays Golden Eggs!

Leimberg, Stephan R. (2005) Estate Planning

In a charitable context, investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitable-minded, and generous donors, which could hurt the charities and trigger a sea change in the way all life insurance is taxed and priced, and in extreme cases encourage criminal activity of the worst kind.
Abstract |Local file in Dropbox|

Stranger-Owned Life Insurance (SOLI) is a rapidly spreading virus that is infecting both individuals and charities. The end result is likely to be a lose-lose-lose situation for the public, the insureds, their families, and the insurance and estate planning communities. In fact, everyone is likely to lose - except the promoter-marketers and third-party investors they assemble to finance what is clearly an end-run around centuries old insurable interest laws. The promoter’s claim is that this arrangement is “a life insurance windfall for charity - without buying a policy or paying anything at all.” These are highly complex and speculative arrangements in which investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitably-minded, and generous donors.

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements and the Planning Opportunities They Offer

Leimberg, Stephan R.; Gibbons, Albert E. (2003) Estate Planning

Life settlements make the most sense where it is likely that, in spite of significant health impairment, the insured may live beyond the point where continuing to pay premiums is economically feasible and the death benefit is exceeded by the overall (including time value of money) cost, a risk that the life settlement company can afford to take because of the pooling concept.
Abstract |Local file in Dropbox|

An interview with Martyn S. Babitz, an attorney and senior wealth planner with PNC Advisors’ Wealth Planning Group, regarding strategies using life settlements, is presented. The actual amount a policyowner will receive from a viatical or senior settlement will depend on numerous factors, including: 1. the type of policy being sold, 2. the face amount (death benefit) of the policy, and 3. the amount of future premium obligations (which will no longer be the insured’s obligation). The proceeds of an insurance policy held by the insured on his or her life are included in the gross estate of the policyowner if he or she dies owning the policy. To avoid estate tax on these insurance proceeds, the owner may want to give the policy to an irrevocable trust or outright to the intended beneficiary(ies). But, under Section 2035, if the owner dies within three years of such a transfer, the death proceeds will be included in his or her taxable estate. To avoid this problem, the policyowner could sell the policy and at some later date, gift the proceeds of the sale.

Life Settlements: A Legitimate Financial Planning Tool

Gardner, Rick (2005) Journal of Practical Estate Planning

A broker who has direct contracts with many funding companies has a much better opportunity to obtain the best offer for policyholders.
Abstract |Local file in Dropbox|

A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are becoming recognized by planning professionals as a viable financial planning tool. Reasons why a client may want to consider selling an insurance policy include: 1. insurance needs have changed, 2. premiums have become unaffordable or inconsistent with current needs, 3. estate planning goals have changed, 4. cash is needed to fund a different life insurance policy, annuity, or investment, 5. funds are needed for long-term health care, and 6. funds are needed as a source of cash for charitable giving. Values-based case studies are presented. Total premiums paid by the policy owner are nontaxable and are the owner’s cost basis. If the cash surrender value is greater than the total premium paid, the difference would be treated as ordinary income. It is important to choose a life settlement broker who shows a steadfast commitment to doing what is best for the client. A good broker will diligently seek out and negotiate the highest offer.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

An Introduction to the Use of Viatical and Life Settlements

Rios, Damien (2004) Estate Planning

Before entering into a viatical settlement contract, policyowner and the policyowner’s advisors should consider all options available to the policyowner, fully understand the process involved in a viatical settlement, and know what rights the policyowner has under applicable law and the governing documents.
Abstract |Local file in Dropbox|

The viatical settlement market provides a valuable alternative to policyowners who no longer wish to keep their life insurance policies, but are not satisfied with the financial return that may be available if the policyowner surrenders the policy to the insurance company. The policyowner or the policyowner’s advisors should determine whether the viatical settlement is a regulated transaction under applicable state law and whether the purchaser must be licensed to purchase the policy. If a license is required, the policy-owner or advisor should verify that the purchaser has the appropriate license by either requesting a copy of the license from the purchaser or contacting the division of insurance in the appropriate state. Lastly, the policyowner should consult his or her advisors concerning the tax consequences of the viatical settlement, the effect that the receipt of the viatical settlement proceeds may have on the policy-owner’s eligibility for government assistance, and any effect the viatical settlement may have on the policyowner’s rights against creditor’s claims.

Life Settlement Transactions: Important Tax and Legal Issues to Consider

Magner, James C.; Leimberg, Stephan R. (2007) Estate Planning

Although the number of life settlement transactions has increased trmendously in recent years, there are still many significant and unresolved tax and legal issues that advisors and fiduciaries must consider.
Abstract |Local file in Dropbox|

Although the sale of a life insurance policy to a life settlement company would seem to be a relatively straightforward transaction, advisors and policy owners may be surprised at the number of documents buyers typically include in their closing package. Advisors will generally find that life settlement companies are unwilling to make substantive modifications to their documents, and there may be valid business reasons for this position. Even if changes are not accepted, there are a number of important issues the advisor should consider in the document review process. Advisors should complete a thorough credit check on the provider and funder, and ask whether the policy is being bought to be sold or to be held. Advisors, particularly those who sign the policy owner’s tax return, should not overlook the fact that life insurance contracts are unique assets subject to special tax rules. Also, loan interest should be carefully reviewed.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

Family Business Review

Life Settlements from the Perspective of Institutional, Real Options, and Stewardship Theories

Dibrell, Clay (2010) Family Business Review

Institutional theory provides a broader perspective on the potential endemic risks associated with the life settlement industry, as it strives to attain legitimacy; real options theory helps predict the outcome of a succession event, which reduces the uncertainty associated with succession to external and internal life settlement stakeholders; stewardship theory suggests life settlements would be a significant financial vehicle, enabling the steward of the firm to maximize his or her utility through extrinsic and intrinsic rewards.
Abstract |Local file in Dropbox|

As families seek alternative forms of financial capital without putting the family business at risk, life settlements are gaining the interest of family businesses and scholars. This commentary draws upon institutional theory, real options theory, and stewardship theory to provide a foundation to better understand life settlements and to complement the work articulated by Adams.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

Financial Executive

Life Settlements: Means for Cashing In Key-Person Policies

Simon, Larry A. (2005) Financial Executive

When an insured key person retires or resigns, instead of cancelling its corporate-owned policy and taking the cash-surrender value, if any is remaining, the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well.
Abstract |Local file in Dropbox|

When an insured key person retires or resigns, the company often cancels its corporate-owned policy and takes the cash-surrender value, if any is remaining. Life settlements provide a viable and attractive option: the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well above the cash-surrender value. In a nutshell, a life insurance policyholder sells the benefits of the policy to an investor. Most investors do not directly negotiate with policyholders; rather, they provide financing for life settlement companies that facilitate buying the policies. Policy owners should insist that their agents and brokers perform due diligence by gathering information from several competitive life settlement companies.

Geneva Papers on Risk and Insurance

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Journal of Accountancy

Virtues and Evils of Life Settlement

Breus, Alan (2008) Journal of Accountancy

Under the right conditions, sale of a life interest may be a good policy.
Abstract |Local file in Dropbox|

Life settlement, boosted by aggressive marketing, has developed into a major secondary market for existing life insurance policies. The rise of this now $15 billion annual market has brought with it fresh regulatory scrutiny to crack down on the parallel growth of stranger-originated life insurance (STOLI). Given the growing importance of this segment of the life insurance business, CPAs should understand how and when life settlement can be a good investment for clients as well as the possible tax implications and hazards.

Turn Unneeded Policies into Cash

Warring, James D. (2005) Journal of Accountancy

A life Settlement can be a better alternative than surrendering a policy, especially with the possible repeal of the federal estate tax still on the horizon.
Abstract |Local file in Dropbox|

Life insurance planning isn’t always about making sure someone has enough coverage. It’s also about finding solutions for people who have too much. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option-a life settlement-to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured’s death. A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy’s face amount and cash surrender value as well as other factors, such as the insured’s health, age and the current policy premium.

What Every CPA Should Know About Life Settlements

Bruno, Susan J. (2008) Journal of Accountancy

To obtain an ideal position to advise clients about life settlements, CPAs should understand the life settlement process and learn criteria for qualifying clients and life settlement companies.
Abstract |Local file in Dropbox|

For individuals 65 and older, a life insurance policy may represent an untapped asset that they are likely totally unaware of. Until recently, the owner of an unneeded or unwanted policy had two options: sell the policy back to the company that issued it for its cash surrender value or allow it to lapse. Now there’s a third and potentially better option in the secondary market, also known as life settlements. CPAs, especially personal financial specialists, are in an ideal position to advise clients about life settlements, but they must first understand the life settlement proposition. This article presents an outline of the process, followed by guidelines for who is a good candidate for life settlement and tips for getting the best price for the policy from a well-qualified settlement company.

New Value in Old Policies

Alexander, Neil (2011) Journal of Accountancy

Clients can recover significant wealth that may betrapped in unneeded life insurance.
Abstract |Local file in Dropbox|

Many clients have life insurance policies they view as unnecessary because they no longer meet their original need. As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. JE McGowan Consulting estimates the potential secondary market for life insurance policies exceeds $18 billion annually. Before clients abandon old policies, CPAs should step in and help them recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. CPAs can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket. Determining if selling a policy is a good idea is a relatively easy process for CPAs – and potentially lucrative for policyholders.

Journal of Actuarial Practice

Accelerated Death Benefits, Viatical Settlements,and Viatical Loans: Options for the Terminally III

Schmidt, Paula (1997) Journal of Actuarial Practice

Because of issues regarding estate tax and estate/inheritance tax treatment of the death benefit remaining after acceleration. and other issues, some insurance companies have been waiting to initiate and introduce accelerated benefits.
Abstract |Local file in Dropbox|

There are three options available for terminally ill insureds who are interested in accessing all or part of the face value of their life insurance policies: through the life insurance company (accelerated death benefits), through a viatical company (a viatical settlement), or through a viatical loan company (a viatical loan). This paper explores the definitions and tax regulations, calculations, and the claims process associated with accelerated death benefits and via tical settlements and loans.

Journal of Alternative Investments

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Journal of Business Ethics

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

Journal of Derivatives

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

Journal of Economic Behavior & Organization

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

Journal of Financial Planning

A Life Settlement Mosaic

Katt, Peter C. (2008) Journal of Financial Planning

Most life settlement investments haven’t matured and profits are almost certainly an illusion.
Abstract |Local file in Dropbox|

The author’s life settlement views are formed from his experiences with clients. Since he is solicited by clients and not the other way around, he takes on what is brought to him. The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning. Almost all other possible life settlement situations should result in the policyowner retaining the policy – at least until the policy is near termination. The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. The appetite for doing life settlement transactions has become so great that the industry has convinced itself that life insurance is so mispriced that the policies of insureds in the same health are attractive targets as well.

A Complex Game: The Life Settlement Process

Katt, Peter C. (2011) Journal of Financial Planning

Even if a policy seller knows who will initially own the policy, it is almost certain that policies will change hands several times before the insured passes.
Abstract |Local file in Dropbox|

This article provides details of a life settlement case the author dealt with last year. The author has worked with Mark for 10 years managing three $2 million UL policies insuring him that are owned by an irrevocable trust. Mark, now 80, has been in poor health since the author’s work began with him. The insurance company involved, AB Life, has only fair financial strength ratings that have been declining. Mark’s life insurance is viewed as other investments he has, thus the logic of wishing to pursue selling some of his policies to diversify his perceived risk with AB Life. Mark noticed an ad from a local agent promising results, so he called the agent. The agent hooked up with a settlement broker and they were very lucky that during this period a buyer for AB Life did emerge. This wasn’t lucky for Mark because this meant large commissions would be subtracted from the purchase price.

Assessing Clients’ Life Settlement Offers

Katt, Peter C. (2002) Journal of Financial Planning

The life settlement firm isn’t in the business to determine what is in the best interests of prospective sellers, so policy holders should have an independent financial analysis done before a policy is sold.
Abstract |Local file in Dropbox|

Life settlement refers to the purchase of unneeded life insurance policies. This article examines whether life settlements are likely to be of value to your clients. A discussion of the difference between needed and wanted life insurance seems to miss the point in the context of life settlements that, by definition, only involve insureds who are in much worse health than when they bought their life insurance policies. The only reason this so-called life insurance secondary market can exist is because the subject policy has become much more valuable due to the insured’s poor health. This makes such a policy anything but unneeded.

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

Journal of Financial Service Professionals

Does Revenue Ruling 2009-13 Sound the Death Knell for Life Settlements?

Elder, Jack E. (2010) Journal of Financial Service Professionals

Revenue Ruling 2009-13 reduces the basis in a permanent life insurance contract by an amount equal to the cost of insurance protection, which, in policies with little or no cash value, is basically all the premiums.
Abstract |Local file in Dropbox|

There are a multitude of reasons why a family may no longer need an existing life insurance policy to meet their estate planning goals. In such cases, the policyowner might consider selling the policy for cash to an unrelated third party in the life insurance settlement market rather than allowing it to lapse. However, the IRS recently issued two revenue rulings that have dramatically impacted the life settlement market by increasing the income tax consequences to the sellers upon the sale of life insurance policies. This article provides a summary and an analysis of the examples set forth in Revenue Ruling 2009-13, which addresses the tax results as they relate to the policyowner/seller of a life insurance policy. Additionally, this article tackles the tax consequences of defaulting on a loan for a premium financed policy.

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

The Life Settlement Industry Tests State Insurable Interest Rules

Kozol, George B. (2009) Journal of Financial Service Professionals

While this litigation may temporarily destabilize the life settlement business, the increase in supply of policies associated with the aging of the baby boomer generation and the increase in demand for uncorrelated assets will fuel stability and growth in the settlement business.
Abstract |Local file in Dropbox|

As world financial markets become more interdependent, the demand for uncorrelated investments continues to increase. Institutional investors and sophisticated individual investors are searching for investment returns that are not linked to bonds, equities, or commodities. In the late 1990s investment bankers and hedge fund investment managers turned to the secondary market for life insurance to create such an investment class-life settlement-backed securities. The demand for the new securities had been so great, prior to the financial crisis that began last fall, that syndicators and promoters required amounts of life insurance on older-age individuals that exceeded the supply available through normal functioning of the secondary market. The unprecedented demand for life policies on older-aged individuals produced life insurance applications and arrangements that tested the boundaries of state insurable interest laws. This article will explain the tension between life settlement-backed securities and state insurable interest laws. The article also will overview regulatory developments that should assuage this tension.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Life Settlements: A Second Look at a Secondary Market

Brecka, Gary; Virkler, Tom (2004) Journal of Financial Service Professionals

While unable to escape its history, the life settlement market has nonetheless avoided repeating mistakes of that history by emerging as an important and growing element of the financial planning world.
Abstract |Local file in Dropbox|

The unacceptable conditions and environment of the formative life settlement market have, understandably, left a bad impression in the minds of many within the life insurance planning industry. However, this dappled history of viatical sales should not predispose a planner to avoid a thorough examination and understanding of the current, rapidly expanding market for life insurance contracts. Today’s life settlement transactions bear little or no resemblance to the viatical sales of yore. Owners of an insurance contract can collect the proceeds payable under the contract upon the death of the insured, or they can sell the policy for its current market value. Institutional investors have come to realize that big blocks of properly underwritten policies acquired through life settlements can form a very predictable, very conservative, and very profitable source of income. Life insurance planners must not avoid involvement in or proper encouragement of life settlement options in the financial plans of their clientele.

Journal of Financial Transformation

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

Journal of Insurance Issues

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Journal of Insurance Regulation

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

Journal of Payment Systems Law

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

Journal of Performance Measurement

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Journal of Practical Estate Planning

Life Settlements: A Legitimate Financial Planning Tool

Gardner, Rick (2005) Journal of Practical Estate Planning

A broker who has direct contracts with many funding companies has a much better opportunity to obtain the best offer for policyholders.
Abstract |Local file in Dropbox|

A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are becoming recognized by planning professionals as a viable financial planning tool. Reasons why a client may want to consider selling an insurance policy include: 1. insurance needs have changed, 2. premiums have become unaffordable or inconsistent with current needs, 3. estate planning goals have changed, 4. cash is needed to fund a different life insurance policy, annuity, or investment, 5. funds are needed for long-term health care, and 6. funds are needed as a source of cash for charitable giving. Values-based case studies are presented. Total premiums paid by the policy owner are nontaxable and are the owner’s cost basis. If the cash surrender value is greater than the total premium paid, the difference would be treated as ordinary income. It is important to choose a life settlement broker who shows a steadfast commitment to doing what is best for the client. A good broker will diligently seek out and negotiate the highest offer.

Journal of Public Policy & Marketing

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

Journal of Retirement

Predicting Longevity: An Analysis of Potential Alternatives to Life Expectancy Reports

Xu, Jiahua; Hoesch, Adrian (2018) Journal of Retirement

A predictive model combining advances in information and communication technology with innovation in medical science is able to overcome shortcomings of traditional LE reports, such as falsification and inaccuracy as well as low productivity.
Abstract |Local file in Dropbox|

Retirees, pension funds, and the insurance industry have all been negatively affected by the wrongful estimation of longevity. The inaccuracies in current life expectancy (LE) reports primarily result from misinterpretations of the influence of resilience factors on longevity. This study examines different and more accurate measurement metrics to minimize the risks related to biased LE calculations. By using both qualitative and quantitative research approaches, this research develops a new conceptual model: a two-factor-LE-analysis model with a telomere test as a medical basis (physiological factors) and a big data approach to filter the psychological factors to longevity. The authors suggest that the new model, together with the insights of the existing LE-projection methodologies, has considerable potential to improve LE predictions.

Journal of Risk and Insurance

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Securitization of Life Insurance Assets and Liabilities

Cowley, Alex; Cummins, J. David (2005) Journal of Risk and Insurance

Life insurance and annuity securitizations will not achieve the level of success of mortgage-backed securities and other types of asset-backed securities until a substantial volume of transactions reaches the public markets.
Abstract |Local file in Dropbox|

The material in this article has been co-authored by Alex Cowley and J. David Cummins and reflects solely the opinion of the co-authors and not that of Lehman Brothers or the Wharton School. The article should not be construed as a product of Lehman Brothers or its Research Department. It is for informational purposes only and has been compiled based upon publicly available sources of data. The co-authors assume full responsibility for its contents. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are solely those of the co-authors and are subject to change without notice. Readers are advised to make an independent review regarding the economic benefits and risks of any of the transactions described herein, including without limitation purchasing or selling any of the financial instruments mentioned in this article, and must reach their own conclusions regarding the legal, tax, accounting, and other aspects of any transaction involving the financial instrument in relation to their particular circumstances.

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

MacMinn, Richard D.; Zhu, Nan (2017) Journal of Risk and Insurance

Conventional longevity forwards exhibit relatively inferior performance in terms of hedging due to the nonnegligible basis risk between the general population and the settled subgroup, whereas biomedical research-backed obligations overcome this issue by providing returns that are strongly positively correlated with the specific longevity shock.
Abstract |Local file in Dropbox|

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument–the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

Coherent Pricing of Life Settlements under Asymmetric Information

Zhu, Nan; Bauer, Daniel (2013) Journal of Risk and Insurance

Policyholders’ adverse selection, resulting from asymmetric information, can explain the dicrepancy between expected and realized return.
Abstract |Local file in Dropbox|

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the “unique risks” within life settlements as recently discussed in the financial press.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Journal of Structured Finance

Open Questions and Recent Guidance Regarding the Life Settlement Industry

Gelfond, Frederic J. (2009) Journal of Structured Finance

The life settlement industry lacks guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind.
Abstract |Local file in Dropbox|

Billions of dollars are being made available by investors from all over the world who are looking to participate in the life settlement industry. For investors who can develop reliable actuarial models and establish long-term business processes, this option presents a means of diversifying a portfolio with non-correlated assets. Despite the number of willing investors and the frequency with which these transactions are occurring, no “cookie cutter” transaction type, or business structure, is predominant in the industry. That is, there is a variety of participants in terms of form of entity, domestic and foreign locale, degrees of active participation in the operation of the “business,” sophistication and needs as to actuarial and business modeling, and expectations regarding buying and holding and securitizing the policies. Among the more significant drivers of this variation in structuring is a given investor’s identification and understanding of the numerous tax issues that are potentially involved. The problem, however, has been the apparent lack of guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind. In May 2009, the Internal Revenue Service released two revenue rulings (Revenue Ruling 2009-13 and Revenue Ruling 2009-14) that answer many of the questions that taxpayers have been asking in this area–or do they?

The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility

Stone, Charles Austin; Zissu, Anne (2012) Journal of Structured Finance

Compared to the deterministic model, the probabilistic and the stochastic valuation models diminish the need for a liquidity facility, because they project higher cash flows earlier on.
Abstract |Local file in Dropbox|

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Inside the Life Settlement Industry: An Institutional Investor’s Perspective

Seitel, Craig L. (2006) Journal of Structured Finance

Providers assess policies’ market value and assemble prime investment portfolios, while agents and brokers identify insureds wanting to sell their policies in the first place.
Abstract |Local file in Dropbox|

The life settlement industry offers a combination of challenges and opportunities for domestic and international investors in an uncorrelated asset class with promising returns. Although the life settlement supply chain is characterized by a variety of interdependent players including, financial planners, life settlement brokers, actuarial experts, verification agents, escrow agents and others, the provider’s role is the point at which the true economic value of the consumer’s life insurance policy is established through pricing and competitive bidding. New providers entering the marketplace can expect to face a variety of operational challenges from sourcing employees to sourcing product flow. This article explains the integral role of the provider through which institutional capital enters the marketplace, examines the challenges of attracting capital, and discusses the administrative issues involved in setting up shop.

Life Settlements Today: A Secret No More

Ziser, Boris (2006) Journal of Structured Finance

As the industry matures, a dramatic increase in life settlement securitization transactions is expected.
Abstract |Local file in Dropbox|

The life settlement market continued to expand in 2005. The expansion has led to an increase in the recognition of this asset class and more traditional lenders have begun to enter the market. Life settlement transactions can be complicated and require structuring expertise to address various issues, including tax and securities law issues. The market is waiting for securitization to become an available vehicle through which industry participants will be able to access the capital markets. As the life settlement market continues to develop and issues such as longevity risk are addressed, we should see an increase in life settlement securitization transactions.

A Provider’s Reflection from Inside the Life Settlement Industry: Understanding the Chaotic Environment

Seitel, Craig L. (2009) Journal of Structured Finance

While many investors were hurt by life expectancy adjustments, new investors stand to benefit from the more conservative analysis.
Abstract |Local file in Dropbox|

Now nine years into its life cycle, the life settlement industry is no longer a fledgling, early-stage sector of the financial community. Regulated by 30 state insurance departments (including Puerto Rico) and, in part, the Financial Industry Regulatory Authority (FINRA), this industry has validated itself by creating a secondary market for life insurance policies to the benefit of consumers as well as an asset class for investors that is uncorrelated with the credit and investment risk of the typical money manager’s portfolio. That said, the second half of 2008 through 2009 thus far has proven to be the most challenging of times this industry has experienced. For reasons brought about by the global economy as well as reasons indigenous to this industry, the life settlement community finds itself in a state of chaos. This article reviews the reasons behind such turmoil and examines the confluence of external and internal forces resulting in this financial perfect storm. It also explores the potential remedies and other factors that provide hope that this industry will not only survive, but prevail, in the long run.

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

Longevity Trading: Bridging the Gap Between the Insurance Markets and the Capital Markets

Dorr, David C. (2007) Journal of Structured Finance

Trading in life settlements and the future of the sector – a liquid life settlement market – requires standards to assist in the efficient transfer of risk and assets.
Abstract |Local file in Dropbox|

The recent ability to trade longevity risk through the use of life settlements, whether for speculation, investment, or as a hedge, has far reaching implications for the entire financial sector. Currently, there are two active markets that trade in life settlements: the secondary market and the tertiary market. The secondary life insurance market is where a life insurance policy first enters the marketplace. The tertiary market is where individual policies and portfolios of policies come back into the market and are among between financial institutions. By providing the industry with secure, business-to-business trading platforms specifically designed for life settlement transactions, online platforms address many of the inefficiencies and shortcomings currently facing this industry. Online exchanges lower the fixed costs associated with brokering, underwriting, and purchasing a life insurance policy and consequently provide the opportunity for smaller policies to be brokered in the secondary market. Electronic trading platforms provide the ideal solution to monitor, update, and report upon the requlatory requirements of both buyers and sellers. Transparency and disclosure is probably the most compelling justification for the use of electronic platforms. For securitization to develop and flourish, an electronic exchange will need to be in place to facilitate trades and transactions.

New Swaps to Hedge Alpha and Beta Longevity Risks of Life Settlement Pools

Mott, Antony R. (2007) Journal of Structured Finance

Whereas life settlements don’t always provide an obvious advantage to insurance companies, longevity derivatives do allow the insurance industry to identify, concentrate, and hedge the risks to insurers, perhaps more effectively than the insurers can do themselves.
Abstract |Local file in Dropbox|

The promise of high profits uncorrelated to the stock market draws prospective investors to life settlements. Spared perhaps from correlation risk, investors face other obvious and not-so-obvious risks including two types of longevity risk. The cost to hedge longevity risk has traditionally been exorbitant because those who take the other side are not themselves hedging. Newly engineered longevity swaps may provide lower cost hedging primarily because they are designed to place together two parties with opposite hedging needs.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

The Case for Sunshine in the Life Settlement Industry

Balinsky, Adam (2006) Journal of Structured Finance

Accessibility of policies, transparency, market-making mechanics and bid-ask processes as well as alternative purchase structures are yet to be addressed by the life settlement industry.
Abstract |Local file in Dropbox|

The secondary market for life insurance policies continues to grow as a result of the positive value created through improved liquidity for an otherwise illiquid asset. While there are critics of the life settlement industry, market forces and property rights ensure that the phenomenon of individuals reselling their life insurance policies will persist. As the life settlement market matures there are several changes that must occur in order to reduce transaction costs, allowing greater market efficiency and ensuring sustainability of the industry. This article makes the case for greater transparency and reduced transaction costs within the industry in order to increase returns to sellers, thereby motivating additional sellers to consider disposing of their policies and unlocking underlying value.

The Life Settlement Market is an Opportunity

Bakos, Tom; Parankirinathan, Kiri (2006) Journal of Structured Finance

Insurers and reinsurers should participate in the life settlement market, through e.g. purchasing impaired policies as a hedge against the increased mortality risk, to drive an orderly and reasonable market development for the benefit of all involved including themselves.
Abstract |Local file in Dropbox|

Life settlements provide life insurance policy owners a viable alternative to surrendering the life policy. The authors address the misunderstandings of many early entrants regarding the inner workings of life insurance products, the terminology, and the applicability of certain actuarial assumptions. The authors point out that insurance companies, rather than portraying life settlement transactions as an attack on policyholder equity, ought to take more responsibility in creating a disciplined and orderly secondary market for life insurance policies that can benefit their policyholders. A mature life settlement market–with attention paid to consumer needs, a technically correct understanding of the risks, responsible pricing, and maintenance of high ethical standards–will thrive and every participant will be well served. Who is better equipped to do this than the insurance companies?

Has Longevity in the U.S. Peaked?

Dorr, David C. (2009) Journal of Structured Finance

Population increase, more expensive healthcare, decource depletion, lower quality food and declining wealth for seniors pull down longevity growth.
Abstract |Local file in Dropbox|

This article enumerates the five factors that influence longevity, with its attendant impact on the life settlement industry. We are at the apex of the longevity growth curve. It may increase slightly over the next 10 years, and then it will drop quite dramatically in the following years. As longevity declines, to the extent professional longevity estimates used by the life settlement industry are reduced at a slower rate than the actual changes in longevity, investors in life settlements may see opportunities to arbitrage those longevity estimates and increase their yields.

Risk Mitigation for Life Settlements

Perera, Nemo; Reeves, Brian (2006) Journal of Structured Finance

Although rating agency requirements and debt holder covenants mandate basic risk-transfer protocols to be utilized, savvy investors actively deploy sophisticated risk transfer mechanisms that combine equity and insurance, to exploit investment value in life insurance assets and create above-par returns.
Abstract |Local file in Dropbox|

Investors seeking new structures for acquiring policies in the life settlement market encounter several underlying risks unique to the asset class. Those risks, described in this article, include contestability risk, missing body risk, insurable interest risk, incorrect-purchase-price risk, life insurance company credit risk, cost-of-insurance risk, and longevity risk. Some risks can be easily mitigated, but others require more complicated risk transfer mechanisms that combine financial products with insurance products. These products range from contestability coverage to more sophisticated mortality risk transfer constructs that blend equity derivative products with property casualty insurance. As the life settlement market evolves, risk mitigation will play an increasing role in reducing volatility and enabling predictable returns to allow for more institutional capital participation. Knowledge about the risks and the available risk mitigation solutions becomes a must for prospective investors interested in entering into the life settlement market.

A Challenging Year in the Life Settlement Industry

Ziser, Boris (2009) Journal of Structured Finance

The life settlement market gradually recovers from the impact of the financial crisis and the extension of the life expectancies in the Fall of 2008.
Abstract |Local file in Dropbox|

The life settlement industry has not been immune to the effects of the financial crisis that has gripped the world in the last 12 months. Combined with shifting life expectancies and continuously developing legislation, the life settlement industry has had its share of challenges. New judicial decisions, however, have helped address certain issues relating to insurable interest, such as whether the intent of the insured is relevant in the analysis, which was a question raised in the widely publicized “Life Product Clearing” case. Furthermore, revenue rulings recently released by the IRS provided additional certainty with respect to the characterization of income in life settlement transactions. Although the economic environment continues to be challenging, as economies begin to recover and investors begin to invest their capital again, the uncorrelated nature of life settlements should continue to make them an attractive alternative asset class.

The “Concept” of a Model Act: The NAIC’s Amended Viatical Settlements Model Act

Washington, Stephen L. (2007) Journal of Structured Finance

Assuming that the legislative framework will see a dispersion of laws and regulations governing life settlements, life settlement market participants should anticipate increased compliance requirements and associated costs.
Abstract |Local file in Dropbox|

The National Association of Insurance Commissioners (the “NAIC”) voted on June 4, 2007 to approve certain proposed amendments to its 2001 Viatical Settlements Model Act (the “Model Act”). The amendments contain a number of useful updates to the prior NAIC model act adopted in 2001 that are aimed at protecting consumers, while others, if ultimately adopted by state legislatures, would appear to be squarely aimed at stifling the rapidly developing life settlement market. While the NAIC voted to approve the proposed amendments as a new model act, it is unlikely that many states will adopt the new Model Act in its adopted form, in view of certain overreaching provisions that are contained in the model. Ironically, the amended Model Act most likely will result in a much greater diversification of life settlement statutes among states that regulate life settlements, rather than the national uniform standard that the NAIC had perhaps hoped would result from its efforts. Adding to the mixed response to the Model Act, the National Conference of Insurance Legislators (“NCOIL”), a non-governmental organization comprised of state legislators involved in insurance legislation, has been reviewing and revising its own model act governing life settlements.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Lurking Pitfalls: Due Diligence in Life Settlements Transactions

Freeman, M. Bryan (2007) Journal of Structured Finance

Most industry players acknowledge the obvious pitfalls of difficult-to-estimate life expectancies, yet some fail to perform institutional-quality underwriting (due diligence) on any number of obvious risk areas.
Abstract |Local file in Dropbox|

In the relatively young history of the secondary market for life insurance, a great deal of attention has focused on the due diligence necessary to adequately gauge life expectancies. Still, many investors overlook various other life settlement transaction risks that have potentially significant consequences, including assuring that policies owned by trusts are saleable and otherwise what they seem to be, adequately following the patchwork of vastly differing state laws and regulations, potential misuse of the accredited investor exemptions of settlement regulation, and more. Thoughtfully manage and eliminate life settlement transaction risk through stringent due diligence procedures. Otherwise, even the simplest aspects of such a transaction may prove to be ticking time bombs.

Taxation of Life Settlements for Policyholders and Investors: An Updated Primer

Casey, Brian T.; Brunt, Kirk Van (2009) Journal of Structured Finance

With the issuance of Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in May 2009, the IRS has provided answers to many of the relevant questions, but also raised new questions, relavent to policy buyers and sellers.
Abstract |Local file in Dropbox|

The taxation of life insurance is a subject encompassing a wide range of lengthy and complicated tax rules. Life settlements add an additional layer of difficulty. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Two recent revenue rulings issued by the Internal Revenue Service (IRS) both complicate and simplify this topic.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Extending the Efficient Frontier through Life Settlements

Dorr, David C. (2008) Journal of Structured Finance

Non-correlation allows life settlements to push the efficient frontier, but not to be exempt from contraction in market liquidity.
Abstract |Local file in Dropbox|

With the increasing acceptance of life settlements as an established asset class, institutional investors have begun to take serious notice that life settlements offer an attractive advantage because of their low correlation to other asset classes. Indeed, since modern portfolio theory is largely based upon the diversification of assets with low or negative correlations, it follows that incorporating pools of life insurance or longevity-linked instruments into a portfolio of diverse assets can significantly enhance a portfolio’s performance. This article goes beyond this basic observation to explain why longevity and mortality-linked instruments will play an increasing role in the future development and construction of institutionally managed portfolios.

How Do the Privacy Laws and USA Patriot Act Apply to the Life Settlement Industry?

Casey, Brian T. (2007) Journal of Structured Finance

Several, but not necessarily all, privacy regulations apply to life settlement companies.
Abstract |Local file in Dropbox|

This article analyzes the application of the Gramm-Leach-Bliley Act, Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy laws, and the USA PATRIOT Act to the life settlement industry. The article further examines how the USA PATRIOT Act created anti-money laundering, suspicious activity reporting, and know-your-customer regulations that apply differently to various segments of the life settlement industry. In addition, the article examines the impact of modern financial and health privacy laws and how they impact insurance products that require disclosure of sensitive information from its customers.

Common Securities Law Questions in the Life Settlements and Life Insurance Premium Finance Industries

Casey, Brian T.; Sherman, Thomas D. (2008) Journal of Structured Finance

Whether a life insurance-linked contract is a security or not depends on contract properties plus the definition on securities from federal and states’ laws.
Abstract |Local file in Dropbox|

This article examines three securities-related questions frequently encountered in the life settlements, or secondary life insurance, and the life insurance premium finance markets: 1) Life insurance policy put or call agreement: Is it a security? 2) A fund that owns life-settlement-acquired life insurance policies of life insurance premium finance loans: Is it an investment company? 3) Life insurance premium finance loan: Is it a security? The questions are analyzed only under the federal securities laws, but a similar analysis would obtain under most states’ securities laws where they apply.

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

Are Life Settlements a Security?

Casey, Brian T.; Sherman, Thomas D. (2007) Journal of Structured Finance

Life settlement, whether with fixed or variable underlying policies, may involve transaction of securities and hence be subject to security regulations; however, exemption can be achieved through proper structuring of the sale.
Abstract |Local file in Dropbox|

Given the extraordinary growth of the U.S. life settlement industry over the last decade, it is not surprising to find increased attention and scrutiny by academicians, the media and legal enforcement authorities–including, among others, state and federal securities regulatory and self-regulatory organizations. The securities laws regulators argue that investments in all forms of life settlement transactions involve the sale of securities, and that the full spectrum of securities laws applies. For the most part, they may be right. In discussing the pertinent securities-related issues surrounding life settlements, there are three fundamental questions to be addressed: 1) Does the sale of the life insurance policy to a passive investor that relies on others to conduct due diligence, price the policy, carry out the transaction, and perform follow-up services involve the sale of a”security" under the Securities Act of 1933, as amended (the “1933 Act”)? 2) Do the “registration” requirements under the 1933 Act apply? 3) Do sales activities in connection with the sale of the life insurance policy trigger any broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”)? This article concludes that the sale of the entire interest in an in-force life insurance policy to a passive investor may very well involve the sale of a security. The sale can be structured so that it is exempt from the registration requirements of state and federal laws. However, the state and federal anti-fraud provisions will apply to the transaction; and any person effecting the sale, particularly if compensated on the basis of the size of a successful sale, might be required to register with the SEC (and the applicable state) as a broker-dealer and be licensed as a security salesperson by the NASD.

The Return on a Pool of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2007) Journal of Structured Finance

As required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.
Abstract |Local file in Dropbox|

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

The Supply and Demand for Life Settlement Contracts

Stone, Charles Austin (2009) Journal of Structured Finance

Life settlement market becomes efficient through an increase in the elasticity of both the supply and demand curves, positively related to the liquidity, transparency, and integrity of the market.
Abstract |Local file in Dropbox|

In this article the author discusses the implications the financial crisis and recession have had and will have on the market for senior life settlements. At first glance the financial crisis should actually spur the growth of the market in senior life settlements. This is because on the supply side of the market significant amounts of wealth of senior citizens have been lost in the stock, bond, and real estate markets. On the other hand, factors on the demand side of the market have reduced the offered prices for life insurance policies. Interestingly, the most dramatic event that impacted the life settlements market as the financial markets entered the crisis stage in the autumn of 2008, was the decision by the directors of 21st Services to revise their mortality tables. The author concludes that the element that creates a sustainable market in life settlements is the increased transparency of pricing on both sides of the market.

Life Settlements: Pricing Challenges and Opportunities

Schwartz, Jesse M.; Wood, Timothy O. (2008) Journal of Structured Finance

In the case of life-settlement assets, the availability of these margins may be squeezed as a result of the high demand for investments uncorrelated to the performance of the economy.
Abstract |Local file in Dropbox|

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters’ assessment relative to the investors’ risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

Another Active Year in the Life Settlement Industry

Ziser, Boris (2008) Journal of Structured Finance

The life settlment market develops, despite uncertainties caused by judical activities, and lack of insurance product covering longevity risk which delays securitization.
Abstract |Local file in Dropbox|

In the past 12 months, there has been significant growth and regulatory and judicial activity in the life settlement industry. In addition to the 28 states that regulated life settlements a year ago, several additional states have either adopted life settlement laws or have proposed legislation that is pending. One common goal shared both by states that adopted new legislation and by those that revised existing legislation was the elimination of stranger-originated life insurance (STOLI). There are two categories of proposed and pending legislation: 1) legislation based on the Viatical Settlements Model Act, and 2) legislation based on the model legislation introduced by the National Conference of Insurance Legislators (NCOIL). On the structured finance front, the continued absence of a widely available and accepted insurance product covering the longevity risk inherent in life settlements, and the dislocation in the asset-backed market as a whole, have combined to further delay the eagerly awaited arrival of a pure, rated, life settlement securitization.

Life Settlements: An Option for Seniors, an Opportunity for Investors

Ziser, Boris (2005) Journal of Structured Finance

Life settlements offer an uncorrelated investment opportunity with attractive yields, as well as an alternative to seniors of which they were not previously aware.
Abstract |Local file in Dropbox|

Over the past two years, the secondary market for life insurance policies, known as life settlements, has grown in the United States to a multi-billion dollar a year industry. Life settlement transactions have increased in volume and are likely to remain attractive due to the yields, the uncorrelated nature of the asset, and the flexibility available in structuring transactions that can accommodate investor preferences. Life settlements often can provide an alternative to seniors of which they were not previously aware. As the universe of parties that can facilitate life settlement transactions expands, more seniors will be presented with the possibility of doing a life settlement and the volume of transactions will increase. As the life settlement market continues to grow, the number of third-party service providers, such as verification agents and medical underwriters, is also likely to increase. The result will be a more robust and efficient market that will enable the participants to continue to benefit from this unique asset.

An Update on the Life Settlement Industry: Recent Challenges and Tasks Ahead

Seitel, Craig L. (2010) Journal of Structured Finance

Regulation in the form of FINRA and the SEC helps validate the life settlement industry, now lacking liquidity, and should create a greater comfort level for potential investors.
Abstract |Local file in Dropbox|

Now more than 10 years into its life cycle, the life settlement industry is facing challenges whose outcomes will determine its very existence. This industry experienced robust and even exponential growth during the first decade of the new millennium. Its vitality and prospects for future growth are in question today. That said, the underlying fundamentals of this industry from an investor’s perspective remain economically sound and compelling. This article reviews the current state of the life settlement industry and explores the ongoing economic impact resulting from the financial crisis, regulatory developments, and industry dynamics. It also explores various future scenarios and potential outcomes as the industry continues to evolve.

Regulating All Life Settlements as Securities: The New Age of the Life Settlement Investment Market

Casey, Brian T.; Lowe, J.D. Jeffrey D. (2011) Journal of Structured Finance

Although the Life Settlements Task Force recommendations have merit and have gained momentum with the SEC and some members of Congress, it is unlikely to see a modification to the definition of “security” to include life settlements in the very near future.
Abstract |Local file in Dropbox|

The life settlement investment market (“LSIM”) has been characterized as a “wild west” type investment environment over the course of the last decade. With very little federal oversight, the market flourished during the late ’90s during the viatical settlement era and well into the 2000s in the form of the life settlement market. The financial meltdown that gripped the United States in late 2007 and continues today has garnered a call to action for the federal government to enact legislation to protect investors from abuses apparent in the investment community. It appears now that the legislative call to action may formally make its way into the LSIM. The Life Settlements Task Force (“LSTF”), created by the Securities and Exchange Commission (“SEC”) in August 2009, was established to investigate and examine issues in the LSIM and to advise the SEC whether market practices in and regulatory oversight of the LSIM could be improved. This article outlines the basic findings of the LSTF as well as detailing the potential repercussions of the federal government acting upon those recommendations.

The Life Settlement Industry Today

Ziser, Boris (2011) Journal of Structured Finance

The improved regulatory landscape, combined with prior owners unable to keep policies in force due to distress caused by credit crunch, has created new opportunities for portfolio purchasers.
Abstract |Local file in Dropbox|

Having survived the credit crisis, extensive regulatory changes, and the negative press, the life settlement industry is still standing. With investors having found a new appreciation for uncorrelated investments, life settlements are emerging as a sensible part of an institutional investor’s portfolio. The frenzied pace of regulatory changes we saw over the course of the last several years has abated, as most states have either adopted new life settlement laws or amended their existing laws. In 2010 the U.S. Securities and Exchange Commission organized a Life Settlement Task Force to examine the business and made a key recommendation to amend the definition of a “security” to include all life settlements. Judicial activity continued in 2010 on issues such as an insurance company’s claim that insurable interest was lacking at the time a policy was issued and allegations of fraud. Portfolio sales are among the most active segments of the life settlement market today.

Inside the Life Settlement Industry: A Provider’s Reflections on the Challenges and Opportunities

Seitel, Craig L. (2007) Journal of Structured Finance

Industry maturation means shifting providers’ focus from managing the supply chain to creating a value chain.
Abstract |Local file in Dropbox|

As a portal to institutional investors and a gateway to settlement brokers, the provider plays a pivotal role in the secondary market supply chain. This article discusses key issues and challenges faced by providers in the current life settlements market. Attracting stable sources of financing is “job one” and critical to the success of a provider company. From the regulators’ and legislators’ perspective, a primary focus will center on transaction transparency and disclosure to the consumer of all commissions paid. Operational challenges include staying abreast of licensure and compliance issues, developing teams of highly skilled life settlement professionals, credentialing industry professionals, developing robust data analytics and data management capabilities, addressing privacy issues, conducting due diligence on investors, and educating novice brokers so as to better manage product flow. As the life settlements industry matures, sustaining the momentum will require a shift away from “managing the supply chain” to “creating a value chain” that emphasizes greater value and transparency to the consumer.

Life Settlements: Product Flow, Opportunities and Constraints

McNealy, Sean; Frith, Marlene H. (2006) Journal of Structured Finance

In sizing up the life settlement marketplace, the lens that should matter most to those who are following the industry should be the perception of those on the receiving end of the product—senior consumers.
Abstract |Local file in Dropbox|

There is little doubt that the life settlement industry has taken a quantum leap forward over the past six years, and a variety of indicators point to the fact that the industry is poised for remarkable growth over the next few years. Public awareness and acceptance of the product has gained traction as thousands of seniors turn to the secondary market each year to maximize the value of their unwanted life insurance policies. In addition to the fact that institutional investors are fueling the product’s growth, most insiders agree that the marketplace is being propelled by a financially sophisticated, aging population, as they discover that an economically sensible exit strategy from unwanted life insurance policies does indeed exist. Although thousands of life settlement transactions are being sourced through agents, brokers, and providers, much of the market potential remains untapped due to product-flow constraints. Furthermore, approximately 80% of the policies presented to funders never make it to the cash register for various reasons. This article presents a general overview of the life settlement market, examines the dynamics and players involved in product flow, and identifies the main drivers and constraints in sourcing policies at the point of sale.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

Journal of Taxation

Vulture Capital Tax Manual-A Brief Guide to the Tax Issues Associated with Financial Investments in Life Settlements

Shapiro, David H. (2007) Journal of Taxation of Financial Products

A proper determination regarding the source (U.S. or foreign) of Sales Income and Death Benefit Income is a critical component of the U.S. tax analysis.
Abstract |Local file in Dropbox|

For several years, terminally ill individuals have been able to sell the entitlement to death benefits associated with their life insurance contracts to investors for cash. More recently, a market has developed that allows healthy individuals to sell their life insurance policies to investors for cash amounts exceed ing the policies cash surrender value. This practice has come to be known simply as the lifetime settlements of life insurance contracts. It would appear that life settlement investing is slowly emerging as a popular hedge fund strategy that is uncorrelated with other strategies and markets. State regulators have begun to focus their attention on these arrangements to help ensure that they are undertaken within certain parameters. Investors (and their tax advisors!) would similarly welcome clarity from the IRS with respect to the numerous tax issues involved. In the meantime, investors can only structure and manage their life settlement investments with careful attention paid to the uncertainty arising from the tax variables.

Taxation of Life Settlements–Unanswered Questions After Rev. Ruls. 2009-13 and 2009-14

Keligian, David L.; Larsen, Robert W. (2009) Journal of Taxation

While recognizing that Section 72(e) does not address the character of income recognized, the IRS has concluded that such income always must be taxed as ordinary income, even if the policy owner had solely an investment intent with respect to the policy.
Abstract |Local file in Dropbox|

For the most part, the Service’s answer to the question, “what is the tax treatment of the proceeds of a life settlement transaction?,” will be “ordinary income.” Given the lack of useful precedent, the IRS seems to have chosen the result that provides the most amount of revenue, despite the fact that at least some purchasers of such life insurance would appear to have an investment motive entitling them to capital gains treatment.

Journal of Taxation of Financial Products

Vulture Capital Tax Manual-A Brief Guide to the Tax Issues Associated with Financial Investments in Life Settlements

Shapiro, David H. (2007) Journal of Taxation of Financial Products

A proper determination regarding the source (U.S. or foreign) of Sales Income and Death Benefit Income is a critical component of the U.S. tax analysis.
Abstract |Local file in Dropbox|

For several years, terminally ill individuals have been able to sell the entitlement to death benefits associated with their life insurance contracts to investors for cash. More recently, a market has developed that allows healthy individuals to sell their life insurance policies to investors for cash amounts exceed ing the policies cash surrender value. This practice has come to be known simply as the lifetime settlements of life insurance contracts. It would appear that life settlement investing is slowly emerging as a popular hedge fund strategy that is uncorrelated with other strategies and markets. State regulators have begun to focus their attention on these arrangements to help ensure that they are undertaken within certain parameters. Investors (and their tax advisors!) would similarly welcome clarity from the IRS with respect to the numerous tax issues involved. In the meantime, investors can only structure and manage their life settlement investments with careful attention paid to the uncertainty arising from the tax variables.

Journal of Wealth Management

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Marquette Elder’s Advisor

The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s Hidden Value

Doherty, Neil A.; O’Dea, B.A. Brian A.; Singer, Hal J. (2004) Marquette Elder’s Advisor

Access to complete and current information regarding their secondary market options would allow policyholders to make optimal decisions regarding their insurance coverage and enable the secondary market to reach its full potential in terms of the welfare gains if provides to consumers.
Abstract |Local file in Dropbox|

Increasingly common usage of the secondary market for life insurance policies is discussed in this article which explains the secondary market and describes the benefits of viatical and life settlement firms as well as accelerated death benefits. Changing regulations of the secondary market and suggested ways for counselors to assist clients in specific circumstances are included.

Marquette Law Review

Long Live Life Settlements: The Current Status and Proposed Direction of the Life Settlement Market

Koutnik, Michael (2013) Marquette Law Review

Coupling a strict judicial adherence to incontestability clauses with state codification of a five-year holding period on newly issued policies would help stabilize the market by providing certainty to investors of validly settled policies while at the same time reducing the financial benefit offered by STOLI transactions.
Abstract |Local file in Dropbox|

The payment of life insurance policy benefits to the insured’s suriving spouse or child is something with which most people are both familiar and comfortable. However, when those benefits are instead paid to a third party investor who has no interest in the insured’s life, some people cry foul. Yet this is the basic premise of the secondary market for life insurance. In this market, insured individuals assign their policy benefits to an investor who agrees to pay the insured a lump sum of money in addition to assuming responsibility for the policy’s premiums. While the underlying concepts that support the secondary market for life insurance policies are not new, the young and imperfectly regulated market has been strained by an increase in supply and demand for these products. Because of the limited guidance within the market, fraud and uncertainty have pervaded many transactions. As a result, many validly settled policies may face challenges in the courts. In an effort to help stabilize and legitimize the secondary market, this Comment recommends coupling a strict judicial interpretation of the incontestability periods contained in many life insurance policies with a five year holding period on newly issued life insurance policies. This framework will help deter fraudulent transactions while promoting certainty among investors.

Michigan Journal of Business

On Life Settlement Pricing

Erkmen, Bilkan (2011) Michigan Journal of Business

Besides technical precision, one should not ignore the role of psychological factors in the development of the life settlement industry.
Abstract |Local file in Dropbox|

Although life settlements as financial products have been in existence and active use in financial markets for quite some time, their pricing has never reached the level of transparency and standardization envisioned by Wall Street. This lack of standardization has been and still is the major roadblock against widespread use of life settlements as investment, diversication and portfolio risk management tools. However, the recent crisis of 2007 has revealed high levels of correlation among existing financial instruments that are in widespread use. This revelation raised an avid interest in new financial instruments that show low correlation to strong market swings. In this respect, life settlements and related products such as death bonds have gained popularity among practitioners and academics alike. This paper proposes a standard pricing framework for life settlements that is consistent with existing methods of risk management and sensitivity analysis widely used in fixed income products.

National Underwriter

How Life Settlements Fit Into The Impaired Risk Picture

Winer, Teresa R. (2003) National Underwriter

The advisor and client need to work together to evaluate the risks and opportunities.
Abstract |Local file in Dropbox|

Reports developments related to the financial services industry in the U.S. Definition of life settlement market; Inclusions of the viatical transactions; Issues on impaired risk.

Reaching Affluent Senior Life Settlement Prospects

Simon, Larry A. (2005) National Underwriter

Do: use photos of seniors enjoying their wealth, include clippings of articles you have written for local publications; don’t: ignore state licensing rules, violate state life settlement advertising filing requirements.
Abstract |Local file in Dropbox|

Selling a life insurance policy through a life settlement may be a major step for a policyholder, even if the policyholder is a high-net-worth client. Marketing life settlements to this group can present a unique set of challenges. These guidelines should help: 1. Members of this group are very careful about those with whom they do business. 2. Hard sells rarely work on affluent seniors. 3. Photos send a message. 4. Seniors have time to read. 5. Before publishing or distributing advertising or marketing materials, and when designing your Web site, always give careful consideration to legal and regulatory requirements in the states in which your information will be disseminated. 6. Licensing requirements also should be considered carefully.

6-Month Life Settlement Outlook: More Growth, More Regulation

Simon, Larry A. (2008) National Underwriter

A push for more uniform standards that effectively address STOLI and aim to stop fraud is expected, protecting both consumers and the professionals aiding seniors in financing planning goals.
Abstract |Local file in Dropbox|

The life settlement market will continue to expand and evolve in the second half of 2008. Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market. Since introduction of the National Conference of Insurance Legislators (NCOIL) and National Association of Insurance Commissioners (NAIC) model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry. This includes 5 bills based on the NAIC model and five based on the NCOIL model.

Coventry Wins Big Against Hancock

Hersch, Warren S. (2011) National Underwriter

NA
Abstract |Local file in Dropbox|

The article discusses the decision of officers of the State Insurance Department in the case of Coventry First LLC against John Hancock Life insurance Co. USA that could affect the life settlements involving conversions of term life insurance policies in New York.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

Consider Life Settlements As An Option For Divesting Life Policies

Arenson, Steven; Miller, Robert G. (2003) National Underwriter

A life settlement can be the means to a client’s financial planning end, delivering the highest economic value and the best solution for changing needs.
Abstract |Local file in Dropbox|

Provides tips in divesting life policies in the U.S. Partial-surrender of the policy; Practice of non-forfeiture provisions; Conversion of the policy into a gift.

Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Fasano, Michael V. (2006) National Underwriter

Life and life settlement industries have more to gain than to lose from each other.
Abstract |Local file in Dropbox|

The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate. A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity. The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other. Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together.

NCOIL Advances Life Settlement Disclosure Model

Thomas, Trevor (2010) National Underwriter

The Life Insurance and Financial Planning Commitee of the National Conference of Insurance Legislators (NCOIL) voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions.
Abstract |Local file in Dropbox|

A group of state lawmakers is proposing imposing a requirement on life insurers to tell policy owners that life settlements are an alternative to surrendering their policies. The Life Insurance and Financial Planning Committee of the National Conference of Insurance Legislators (NCOIL), Troy, NY, is drafting model state legislation to require life insurers to list life settlements as one of the options policy owners have when considering cashing in or lapsing their policies. In another development, NCOIL’s Life Insurance and Financial Planning Committee voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions (STAT).

It’s Time To Ban IOLI

Piontek, Steve (2005) National Underwriter

Investor-owned life insurance, which moves far from the noble basis of protecting loved ones, inevitably cheapens the concept and should be banned.
Abstract |Local file in Dropbox|

It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners (NAIC) took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution. What is pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment. IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.

Helping Your Clients Sell Unneeded Policies

Simon, Larry A. (2004) National Underwriter

A good settlement candidate has an universal insurance policy with above half a million coverage and a life expectancy between 2 to 10 years.
Abstract |Local file in Dropbox|

The majority of life insurance policyholders let their policies lapse or surrender the policies for a minimal cash value. The wealth lost as a result of these policy surrenders is significant. The National Association of Insurance Commissioners, Kansas City, MO, estimates that in 1996, for example, nearly $1.5 trillion in life insurance face amount lapsed or was canceled by policyholders. Today, the life settlement market is giving financial advisors the means to help policy owners extract the wealth trapped in unneeded life insurance policies. Unlike viaticals, life settlements are based on the proposition that some insured individuals no longer want, need or can afford their coverage. Life settlements aren’t for everyone. A good candidate typically has $500,000 or more in universal life coverage. Life settlements are designed for people who are not suffering from a life-threatening or catastrophic illness and whose life expectancy is about 2 to 10 years.

North American Actuarial Journal

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Northwestern Journal of International Law & Business

Regulation Not Prohibition: The Comparative Case Against the Insurable Interest Doctrine

Atmeh, Sharo Michael (2011) Northwestern Journal of International Law & Business

NA
Abstract |Local file in Dropbox|

American law requires an insurable interest—a pecuniary or affective stake in the subject of an insurance policy—as a predicate to properly obtaining insurance. In theory, the rule prevents both wagering on individual lives and moral hazard. In practice, the doctrine is avoided by complex insurance transaction structuring to effectuate both origination and transfers of insurance by individuals without an insurable interest. This paper argues that it is time to abandon the insurable interest doctrine. As both the English and Australian experiences indicate, elimination of the insurable interest doctrine will have little detrimental pecuniary effect on the insurance industry, while freeing consumers considerably. Indeed, New York comes to the brink of eliminating the doctrine in its recent decision in Kramer v. Phoenix Life Insurance Co. by sanctioning an immediate life insurance assignment procedure that in effect eliminates the need for an insurable interest in the assignee. However, Delaware, in PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust and Lincoln National Life Insurance Co. v. Joseph Schlanger 2006 Insurance Trust, breathes new life into an old doctrine. Overall, though, adhering to an arcane doctrine that prevents the value of an insurance policy from being realized without extreme legal burden both hampers the market and harms consumers, as the benefits of such transactions are both lessened by transaction costs and accrue to only a select few individuals.

Penn State Law Review

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

Pension and Longevity Risk Transfer for Institutional Investors

Lessons from the World of Micro Longevity

Sheridan, Matthew (2014) Pension and Longevity Risk Transfer for Institutional Investors

Life settlements provide useful, real-world lessons – such as awareness of informational asymmetries and the use of big data techniques – in managing longevity risk, many of which are applicable to the developing macro-longevity markets.
Abstract |Local file in Dropbox|

The pension risk transfer market has a bottleneck in its inability to attract sufficient institutional investor interest as longevity risk takers. Having spent many years at a large institution as part of a team investing directly in longevity risk via the life settlements market, the author encountered many of the challenges of managing this nascent risk type. The pension risk transfer market often seems at pains to distance itself from its life settlements cousin; however, in many ways “longevity is longevity” and the experience of dealing with the challenges in life settlements can offer valuable insights to investors across the full spectrum of the risk class. The article is aimed at capital markets investors considering longevity as an investable asset. It offers a discussion of the current perception of longevity risk, as well as a list of hints and warnings derived from direct market experience.

Pepperdine Law Review

Angels of Mercy or Greedy Capitalists? Buying Life Insurance Policies from the Terminally Ill

Schultz, Denise M. (1996) Pepperdine Law Review

NA
Abstract |Local file in Dropbox|

In response to the financial hardships burdening AIDS patients and other terminally ill individuals, the “viatical settlement” industry has emerged. Although as a general rule the purchaser of an insurance policy must possess an insurable interest in the insured’s life, controversy exists as to whether a person without an insurable interest, such as a viatical settlement company, may obtain an insurance policy by assignment. This goal is accomplished by requiring viatical settlement companies to procure a witnessed, signed statement from the terminally ill individual attesting that the viator freely consents to the contract, acknowledges the illness, understands the risks and benefits of the settlement, and releases all medical records to the viatical company. Opponents contend that licensing requirements stifle a terminally ill individual’s opportunity to take full advantage of the viatical settlement industry by excluding willing purchasers from the market. The ruling addressed a taxpayer’s irrevocable assignment of a life insurance policy to a viatical settlement company for approximately sixty-three percent of the policy’s face value. The Service ruled that amounts received from the assignment of the life insurance policy to the viatical settlement company were “not amounts received under a life insurance contract by reason of the death of the insured.

Practical Lawyer

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

Quinnipiac Probate Law Journal

Betting on Death or Just Cashing In?: Taking a Look at the Life Settlement Industry Through the Lens of Kramer v. Phoenix Life Insurance

Brunau, Terence John (2012) Quinnipiac Probate Law Journal

The challenge is to create a set of laws that prevent investors from coercively betting on death at the expense of defenseless policy holders, but which also allow people to just cash in.
Abstract |Local file in Dropbox|

The article presents information on the Stranger Originated Life Insurance (STOLI) transactions with reference to the trial of Kramer v. Phoenix Life Insurance Co. It discusses the insurance law of New York based on selling of life insurance policies to strangers. It further focuses on the origin of STOLI and the decisions of the New York Court of Appeals. It also discusses the need of precise regulations for protecting legitimate life settlements.

Real Property, Probate and Trust Journal

The Benefits of a Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Real Property, Probate and Trust Journal

The secondary market of life insurance provides liquidity and enhances policy value, which benefits policyholders and feeds back to the primary market in an expansion of demand.
Abstract |Local file in Dropbox|

This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of “impaired’’ policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Risk Management and Insurance Review

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Gatzert, Nadine (2010) Risk Management and Insurance Review

In the U.S., where policies of individuals above age 65 with reduced life expectancy are traded, while in the U.K. and Germany, with-profits and participating endowment policies with a fixed term are traded.
Abstract |Local file in Dropbox|

In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S.market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market’s unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

Rutgers Law Review

Regulating the Secondary Market for Life Insurance: Promoting Consistency To Maximize Utility

Heady, Jared (2010) Rutgers Law Review

NA
Abstract |Local file in Dropbox|

A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.

Southern Business Review

Analyzing an Emerging Industry: Viatical Transactions and the Secondary Market for Life Insurance Policies

Giacalone, Joseph A. (2001) Southern Business Review

Accelerated death benefits and the increased regulatory oversight challenges the life settlement industry.
Abstract |Local file in Dropbox|

Traditionally, life insurance has been primarily viewed as a legacy paid to designated beneficiaries after the death of the insured. Increasingly, financial planners, estate planners, and other financial advisors are advising clients to consider their life insurance policies as an underutilized asset that can provide significant financial resources to them while they are still alive.

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Syracuse Law Review

Life Settlements: The Death Wish Industry

Martin, Susan Lorde (2014) Syracuse Law Review

There is nothing to be gained by turning life insurance into a financial product that creates wealth for financiers who merely move money around, perverting the purpose of life insurance.
Abstract |Local file in Dropbox|

… So, the industry shifted to buying life insurance policies insuring the lives of people with other terminal illnesses; then, to buying policies of old people who were not terminally ill; then, to encouraging older people to buy insurance policies for the express purpose of selling them to investors; and finally, to bundling those policies together, securitizing them, and selling pieces of the bundles to investors. … On his application, Rucker said the policy was not going to be transferred to investors, and investors were not going to pay the policy premiums. … The court noted that incontestability clauses operate as statutes of limitations that keep insurance companies from continuing to collect premiums and reap profits until they have to pay out on policies, which they will refuse to do by claiming fraud or lack of insurable interest. … As in most of them, the new Arizona statute provides that insureds may not enter into life settlement contracts within two years of the issuance of policies, with exceptions similar to those in the New York statute. … Arizona’s statute suggests legislators there, like legislators in almost all other states with similar statutes, had a great deal of concern about promoters of life settlement agreements engaging in fraud and encouraging insureds and investors to enter into transactions that were not appropriate for them. … States became more amenable to various gambling enterprises because they were a source of revenue for the government. … Although life insurance companies oppose life settlements, they also provide the policies for those arrangements by encouraging consumers to purchase whole life policies (and their variants) instead of term insurance. … Other risks for investors in life settlement funds include: liquidity risk because cash outflows to pay premiums and fund redemptions occur regularly, whereas cash inflows from death benefits and new investments are unpredictable; policy availability risk; operational risks including litigation that can cost more than the death benefits; credit risk caused by the possible failure of the insurance carriers that underwrite the policies; and regulation risk because of changes in state and federal laws.

Tort Trial & Insurance Practice Law Journal

Investing with the Grim Reaper: Insurable Interest and Assignment in Life Insurance

Richmond, Douglas R. (2012) Tort Trial & Insurance Practice Law Journal

NA
Abstract |Local file in Dropbox|

Stranger-owned life insurance, commonly known by the acronym STOLI, has for several years been a key practice of the so-called life settlements industry. STOLI generally describes the purchase of life insurance by an insured with the intent of assigning ownership of the policy along with its death benefits to investors who do not have an insurable interest in the insured’s life. State statutes regulating STOLI arrangements often define STOLI in this way. This is not a perfect description or definition of STOLI, however, because life settlement companies may purchase life insurance policies from individuals over the age of 65 who have remaining life expectancies of six to twelve years (although in some instances people with longer life expectancies may be considered), but who did not originally purchase their policies with the intent to transfer ownership of them to strangers. Insureds in this second category may seek to sell their policies because of shifts in personal financial preferences or due to changes in their circumstances, such as disability, divorce, retirement, or various forms of financial distress. This is still strangerowned life insurance, even if the original intent to transfer policy ownership is missing. […]of these differences, and while the mechanics of STOLI transactions may vary-they commonly involve major cash payments to insureds by intermediaries or investors, the formation of irrevocable life insurance trusts, and premium financing, among other techniques9- STOLI is unquestionably more an investment vehicle than an insurance transaction. The basic concept is that the life settlement company that purchases the policy will pay the insured an amount greater than the cash surrender value of the policy but much less than the death benefit, will thereafter keep the policy in force until the insured dies, and will then profit by collecting the difference between the death benefit and the combination of the sum paid to the insured and the premiums paid to keep the policy in force.11 Life settlements may be securitized, such that investors who purchase the resulting bonds profit in essentially the same fashion.

Wagering on the Lives of Strangers: The Insurable Interest Requirement in the Life Insurance Secondary Market

Swisher, Peter N. (2015) Tort Trial & Insurance Practice Law Journal

NA
Abstract |Local file in Dropbox|

The purpose of this article is to explore and analyze the crucial inter- relationship and the present tension existing between various life settlement alternatives and the insurable interest requirement for life insurance. Does the 240-year-old insurable interest doctrine adequately meet the needs of a modern society in recognizing a secondary market for life in- surance? If so, what additional remedies, if any, are available to both the insured and the insurer to legally protect the contractual rights and reasonable expectations of the parties?

University of Pennsylvania Journal of Business Law

Betting on the Lives of Strangers: Life Settlements, STOLI, and Securitization

Martin, Susan Lorde (2010) University of Pennsylvania Journal of Business Law

Life insurance companies should reconsider the amount they pay out in surrender value so that life settlement offers would not look so attractive.
Abstract |Local file in Dropbox|

Life insurance serves the important purpose of providing a means for families and businesses to survive the premature death of a person whose support they require to maintain themselves. Over time, life insurance has become a much more sophisticated financial product incorporating savings plans, mutual fund investments, and securitizations. This article recounts the history of lfe insurance including the development of the insurable interest doctrine. It describes life settlements, especially strangeroriginated life insurance (STOLI) policies, which represent a particular abuse of the purpose of life insurance. The article discusses the securitization of pools of life insurance policies, reminiscent of the securitization of sub-prime mortgages. Then state and federal attempts at regulation and a variety of lawsuits are summarized. The article concludes that life insurance is such an important protection for families and businesses that its availability for its primary purpose should not be compromised by becoming the basis for complicated, misunderstood, and, in some cases, fraudulent financial products.

Yale Law & Policy Review

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

Zeitschrift f{"{u}}r die gesamte Versicherungswissenschaft

Implicit Options in Life Insurance: An Overview

Gatzert, Nadine (2009) Zeitschrift f{"{u}}r die gesamte Versicherungswissenschaft

A trend toward risk management systems based on the fair value concept offers
Abstract |Local file in Dropbox|

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. In this article, we first present the different contract designs in Europe and the United States and point out differences in the contract design. Second, a comprehensive overview and description of implicit options contained in these contracts is provided. With focus on participating contracts, we present contract design, valuation methods, and main results of several recent articles in this field. The study indicates that current developments regarding regulation (Solvency II, Swiss Solvency Test), accounting (IFRS), customer needs, and secondary life insurance markets may lead to a trend away from traditional contract design of participating policies and toward new products that are of a more transparent modular form such as variable annuities. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.

By author

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caption — author: no. of articles (rank)

Adams, Edward S.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

Affolter, Sarah

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

Alexander, Neil

New Value in Old Policies

Alexander, Neil (2011) Journal of Accountancy

Clients can recover significant wealth that may betrapped in unneeded life insurance.
Abstract |Local file in Dropbox|

Many clients have life insurance policies they view as unnecessary because they no longer meet their original need. As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. JE McGowan Consulting estimates the potential secondary market for life insurance policies exceeds $18 billion annually. Before clients abandon old policies, CPAs should step in and help them recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. CPAs can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket. Determining if selling a policy is a good idea is a relatively easy process for CPAs – and potentially lucrative for policyholders.

Amoia, Michael F.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

Arenson, Steven

Consider Life Settlements As An Option For Divesting Life Policies

Arenson, Steven; Miller, Robert G. (2003) National Underwriter

A life settlement can be the means to a client’s financial planning end, delivering the highest economic value and the best solution for changing needs.
Abstract |Local file in Dropbox|

Provides tips in divesting life policies in the U.S. Partial-surrender of the policy; Practice of non-forfeiture provisions; Conversion of the policy into a gift.

Atmeh, Sharo Michael

Regulation Not Prohibition: The Comparative Case Against the Insurable Interest Doctrine

Atmeh, Sharo Michael (2011) Northwestern Journal of International Law & Business

NA
Abstract |Local file in Dropbox|

American law requires an insurable interest—a pecuniary or affective stake in the subject of an insurance policy—as a predicate to properly obtaining insurance. In theory, the rule prevents both wagering on individual lives and moral hazard. In practice, the doctrine is avoided by complex insurance transaction structuring to effectuate both origination and transfers of insurance by individuals without an insurable interest. This paper argues that it is time to abandon the insurable interest doctrine. As both the English and Australian experiences indicate, elimination of the insurable interest doctrine will have little detrimental pecuniary effect on the insurance industry, while freeing consumers considerably. Indeed, New York comes to the brink of eliminating the doctrine in its recent decision in Kramer v. Phoenix Life Insurance Co. by sanctioning an immediate life insurance assignment procedure that in effect eliminates the need for an insurable interest in the assignee. However, Delaware, in PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust and Lincoln National Life Insurance Co. v. Joseph Schlanger 2006 Insurance Trust, breathes new life into an old doctrine. Overall, though, adhering to an arcane doctrine that prevents the value of an insurance policy from being realized without extreme legal burden both hampers the market and harms consumers, as the benefits of such transactions are both lessened by transaction costs and accrue to only a select few individuals.

Bajo-Davo, Nuria

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Bakos, Tom

The Life Settlement Market is an Opportunity

Bakos, Tom; Parankirinathan, Kiri (2006) Journal of Structured Finance

Insurers and reinsurers should participate in the life settlement market, through e.g. purchasing impaired policies as a hedge against the increased mortality risk, to drive an orderly and reasonable market development for the benefit of all involved including themselves.
Abstract |Local file in Dropbox|

Life settlements provide life insurance policy owners a viable alternative to surrendering the life policy. The authors address the misunderstandings of many early entrants regarding the inner workings of life insurance products, the terminology, and the applicability of certain actuarial assumptions. The authors point out that insurance companies, rather than portraying life settlement transactions as an attack on policyholder equity, ought to take more responsibility in creating a disciplined and orderly secondary market for life insurance policies that can benefit their policyholders. A mature life settlement market–with attention paid to consumer needs, a technically correct understanding of the risks, responsible pricing, and maintenance of high ethical standards–will thrive and every participant will be well served. Who is better equipped to do this than the insurance companies?

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

Balinsky, Adam

The Case for Sunshine in the Life Settlement Industry

Balinsky, Adam (2006) Journal of Structured Finance

Accessibility of policies, transparency, market-making mechanics and bid-ask processes as well as alternative purchase structures are yet to be addressed by the life settlement industry.
Abstract |Local file in Dropbox|

The secondary market for life insurance policies continues to grow as a result of the positive value created through improved liquidity for an otherwise illiquid asset. While there are critics of the life settlement industry, market forces and property rights ensure that the phenomenon of individuals reselling their life insurance policies will persist. As the life settlement market matures there are several changes that must occur in order to reduce transaction costs, allowing greater market efficiency and ensuring sustainability of the industry. This article makes the case for greater transparency and reduced transaction costs within the industry in order to increase returns to sellers, thereby motivating additional sellers to consider disposing of their policies and unlocking underlying value.

Bauer, Daniel

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Coherent Pricing of Life Settlements under Asymmetric Information

Zhu, Nan; Bauer, Daniel (2013) Journal of Risk and Insurance

Policyholders’ adverse selection, resulting from asymmetric information, can explain the dicrepancy between expected and realized return.
Abstract |Local file in Dropbox|

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the “unique risks” within life settlements as recently discussed in the financial press.

Bayston, Darwin M.

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Bhattacharya, Jay

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Blake, David

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Bozanic, Kelly J.

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

Braun, Alexander

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

Brecka, Gary

Life Settlements: A Second Look at a Secondary Market

Brecka, Gary; Virkler, Tom (2004) Journal of Financial Service Professionals

While unable to escape its history, the life settlement market has nonetheless avoided repeating mistakes of that history by emerging as an important and growing element of the financial planning world.
Abstract |Local file in Dropbox|

The unacceptable conditions and environment of the formative life settlement market have, understandably, left a bad impression in the minds of many within the life insurance planning industry. However, this dappled history of viatical sales should not predispose a planner to avoid a thorough examination and understanding of the current, rapidly expanding market for life insurance contracts. Today’s life settlement transactions bear little or no resemblance to the viatical sales of yore. Owners of an insurance contract can collect the proceeds payable under the contract upon the death of the insured, or they can sell the policy for its current market value. Institutional investors have come to realize that big blocks of properly underwritten policies acquired through life settlements can form a very predictable, very conservative, and very profitable source of income. Life insurance planners must not avoid involvement in or proper encouragement of life settlement options in the financial plans of their clientele.

Breus, Alan

Virtues and Evils of Life Settlement

Breus, Alan (2008) Journal of Accountancy

Under the right conditions, sale of a life interest may be a good policy.
Abstract |Local file in Dropbox|

Life settlement, boosted by aggressive marketing, has developed into a major secondary market for existing life insurance policies. The rise of this now $15 billion annual market has brought with it fresh regulatory scrutiny to crack down on the parallel growth of stranger-originated life insurance (STOLI). Given the growing importance of this segment of the life insurance business, CPAs should understand how and when life settlement can be a good investment for clients as well as the possible tax implications and hazards.

Brockett, Patrick L.

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Brunau, Terence John

Betting on Death or Just Cashing In?: Taking a Look at the Life Settlement Industry Through the Lens of Kramer v. Phoenix Life Insurance

Brunau, Terence John (2012) Quinnipiac Probate Law Journal

The challenge is to create a set of laws that prevent investors from coercively betting on death at the expense of defenseless policy holders, but which also allow people to just cash in.
Abstract |Local file in Dropbox|

The article presents information on the Stranger Originated Life Insurance (STOLI) transactions with reference to the trial of Kramer v. Phoenix Life Insurance Co. It discusses the insurance law of New York based on selling of life insurance policies to strangers. It further focuses on the origin of STOLI and the decisions of the New York Court of Appeals. It also discusses the need of precise regulations for protecting legitimate life settlements.

Bruno, Susan J.

What Every CPA Should Know About Life Settlements

Bruno, Susan J. (2008) Journal of Accountancy

To obtain an ideal position to advise clients about life settlements, CPAs should understand the life settlement process and learn criteria for qualifying clients and life settlement companies.
Abstract |Local file in Dropbox|

For individuals 65 and older, a life insurance policy may represent an untapped asset that they are likely totally unaware of. Until recently, the owner of an unneeded or unwanted policy had two options: sell the policy back to the company that issued it for its cash surrender value or allow it to lapse. Now there’s a third and potentially better option in the secondary market, also known as life settlements. CPAs, especially personal financial specialists, are in an ideal position to advise clients about life settlements, but they must first understand the life settlement proposition. This article presents an outline of the process, followed by guidelines for who is a good candidate for life settlement and tips for getting the best price for the policy from a well-qualified settlement company.

Brunt, Kirk Van

Taxation of Life Settlements for Policyholders and Investors: An Updated Primer

Casey, Brian T.; Brunt, Kirk Van (2009) Journal of Structured Finance

With the issuance of Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in May 2009, the IRS has provided answers to many of the relevant questions, but also raised new questions, relavent to policy buyers and sellers.
Abstract |Local file in Dropbox|

The taxation of life insurance is a subject encompassing a wide range of lengthy and complicated tax rules. Life settlements add an additional layer of difficulty. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Two recent revenue rulings issued by the Internal Revenue Service (IRS) both complicate and simplify this topic.

Cairns, Andrew J. G.

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Callahan, Caleb J.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Casey, Brian T.

Taxation of Life Settlements for Policyholders and Investors: An Updated Primer

Casey, Brian T.; Brunt, Kirk Van (2009) Journal of Structured Finance

With the issuance of Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in May 2009, the IRS has provided answers to many of the relevant questions, but also raised new questions, relavent to policy buyers and sellers.
Abstract |Local file in Dropbox|

The taxation of life insurance is a subject encompassing a wide range of lengthy and complicated tax rules. Life settlements add an additional layer of difficulty. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Two recent revenue rulings issued by the Internal Revenue Service (IRS) both complicate and simplify this topic.

How Do the Privacy Laws and USA Patriot Act Apply to the Life Settlement Industry?

Casey, Brian T. (2007) Journal of Structured Finance

Several, but not necessarily all, privacy regulations apply to life settlement companies.
Abstract |Local file in Dropbox|

This article analyzes the application of the Gramm-Leach-Bliley Act, Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy laws, and the USA PATRIOT Act to the life settlement industry. The article further examines how the USA PATRIOT Act created anti-money laundering, suspicious activity reporting, and know-your-customer regulations that apply differently to various segments of the life settlement industry. In addition, the article examines the impact of modern financial and health privacy laws and how they impact insurance products that require disclosure of sensitive information from its customers.

Common Securities Law Questions in the Life Settlements and Life Insurance Premium Finance Industries

Casey, Brian T.; Sherman, Thomas D. (2008) Journal of Structured Finance

Whether a life insurance-linked contract is a security or not depends on contract properties plus the definition on securities from federal and states’ laws.
Abstract |Local file in Dropbox|

This article examines three securities-related questions frequently encountered in the life settlements, or secondary life insurance, and the life insurance premium finance markets: 1) Life insurance policy put or call agreement: Is it a security? 2) A fund that owns life-settlement-acquired life insurance policies of life insurance premium finance loans: Is it an investment company? 3) Life insurance premium finance loan: Is it a security? The questions are analyzed only under the federal securities laws, but a similar analysis would obtain under most states’ securities laws where they apply.

Are Life Settlements a Security?

Casey, Brian T.; Sherman, Thomas D. (2007) Journal of Structured Finance

Life settlement, whether with fixed or variable underlying policies, may involve transaction of securities and hence be subject to security regulations; however, exemption can be achieved through proper structuring of the sale.
Abstract |Local file in Dropbox|

Given the extraordinary growth of the U.S. life settlement industry over the last decade, it is not surprising to find increased attention and scrutiny by academicians, the media and legal enforcement authorities–including, among others, state and federal securities regulatory and self-regulatory organizations. The securities laws regulators argue that investments in all forms of life settlement transactions involve the sale of securities, and that the full spectrum of securities laws applies. For the most part, they may be right. In discussing the pertinent securities-related issues surrounding life settlements, there are three fundamental questions to be addressed: 1) Does the sale of the life insurance policy to a passive investor that relies on others to conduct due diligence, price the policy, carry out the transaction, and perform follow-up services involve the sale of a”security" under the Securities Act of 1933, as amended (the “1933 Act”)? 2) Do the “registration” requirements under the 1933 Act apply? 3) Do sales activities in connection with the sale of the life insurance policy trigger any broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”)? This article concludes that the sale of the entire interest in an in-force life insurance policy to a passive investor may very well involve the sale of a security. The sale can be structured so that it is exempt from the registration requirements of state and federal laws. However, the state and federal anti-fraud provisions will apply to the transaction; and any person effecting the sale, particularly if compensated on the basis of the size of a successful sale, might be required to register with the SEC (and the applicable state) as a broker-dealer and be licensed as a security salesperson by the NASD.

Regulating All Life Settlements as Securities: The New Age of the Life Settlement Investment Market

Casey, Brian T.; Lowe, J.D. Jeffrey D. (2011) Journal of Structured Finance

Although the Life Settlements Task Force recommendations have merit and have gained momentum with the SEC and some members of Congress, it is unlikely to see a modification to the definition of “security” to include life settlements in the very near future.
Abstract |Local file in Dropbox|

The life settlement investment market (“LSIM”) has been characterized as a “wild west” type investment environment over the course of the last decade. With very little federal oversight, the market flourished during the late ’90s during the viatical settlement era and well into the 2000s in the form of the life settlement market. The financial meltdown that gripped the United States in late 2007 and continues today has garnered a call to action for the federal government to enact legislation to protect investors from abuses apparent in the investment community. It appears now that the legislative call to action may formally make its way into the LSIM. The Life Settlements Task Force (“LSTF”), created by the Securities and Exchange Commission (“SEC”) in August 2009, was established to investigate and examine issues in the LSIM and to advise the SEC whether market practices in and regulatory oversight of the LSIM could be improved. This article outlines the basic findings of the LSTF as well as detailing the potential repercussions of the federal government acting upon those recommendations.

Cavaliere, Frank J.

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

Chuang, Shuo-Li

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Cole, Cassandra R.

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

Colosimo, Liz

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Coughlan, Guy

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Covert, Neil

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

Cowley, Alex

Securitization of Life Insurance Assets and Liabilities

Cowley, Alex; Cummins, J. David (2005) Journal of Risk and Insurance

Life insurance and annuity securitizations will not achieve the level of success of mortgage-backed securities and other types of asset-backed securities until a substantial volume of transactions reaches the public markets.
Abstract |Local file in Dropbox|

The material in this article has been co-authored by Alex Cowley and J. David Cummins and reflects solely the opinion of the co-authors and not that of Lehman Brothers or the Wharton School. The article should not be construed as a product of Lehman Brothers or its Research Department. It is for informational purposes only and has been compiled based upon publicly available sources of data. The co-authors assume full responsibility for its contents. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are solely those of the co-authors and are subject to change without notice. Readers are advised to make an independent review regarding the economic benefits and risks of any of the transactions described herein, including without limitation purchasing or selling any of the financial instruments mentioned in this article, and must reach their own conclusions regarding the legal, tax, accounting, and other aspects of any transaction involving the financial instrument in relation to their particular circumstances.

Cummins, J. David

Securitization of Life Insurance Assets and Liabilities

Cowley, Alex; Cummins, J. David (2005) Journal of Risk and Insurance

Life insurance and annuity securitizations will not achieve the level of success of mortgage-backed securities and other types of asset-backed securities until a substantial volume of transactions reaches the public markets.
Abstract |Local file in Dropbox|

The material in this article has been co-authored by Alex Cowley and J. David Cummins and reflects solely the opinion of the co-authors and not that of Lehman Brothers or the Wharton School. The article should not be construed as a product of Lehman Brothers or its Research Department. It is for informational purposes only and has been compiled based upon publicly available sources of data. The co-authors assume full responsibility for its contents. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are solely those of the co-authors and are subject to change without notice. Readers are advised to make an independent review regarding the economic benefits and risks of any of the transactions described herein, including without limitation purchasing or selling any of the financial instruments mentioned in this article, and must reach their own conclusions regarding the legal, tax, accounting, and other aspects of any transaction involving the financial instrument in relation to their particular circumstances.

Daily, Glenn

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

Deng, Yinglu

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Dibrell, Clay

Life Settlements from the Perspective of Institutional, Real Options, and Stewardship Theories

Dibrell, Clay (2010) Family Business Review

Institutional theory provides a broader perspective on the potential endemic risks associated with the life settlement industry, as it strives to attain legitimacy; real options theory helps predict the outcome of a succession event, which reduces the uncertainty associated with succession to external and internal life settlement stakeholders; stewardship theory suggests life settlements would be a significant financial vehicle, enabling the steward of the firm to maximize his or her utility through extrinsic and intrinsic rewards.
Abstract |Local file in Dropbox|

As families seek alternative forms of financial capital without putting the family business at risk, life settlements are gaining the interest of family businesses and scholars. This commentary draws upon institutional theory, real options theory, and stewardship theory to provide a foundation to better understand life settlements and to complement the work articulated by Adams.

Doherty, Neil A.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s Hidden Value

Doherty, Neil A.; O’Dea, B.A. Brian A.; Singer, Hal J. (2004) Marquette Elder’s Advisor

Access to complete and current information regarding their secondary market options would allow policyholders to make optimal decisions regarding their insurance coverage and enable the secondary market to reach its full potential in terms of the welfare gains if provides to consumers.
Abstract |Local file in Dropbox|

Increasingly common usage of the secondary market for life insurance policies is discussed in this article which explains the secondary market and describes the benefits of viatical and life settlement firms as well as accelerated death benefits. Changing regulations of the secondary market and suggested ways for counselors to assist clients in specific circumstances are included.

The Benefits of a Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Real Property, Probate and Trust Journal

The secondary market of life insurance provides liquidity and enhances policy value, which benefits policyholders and feeds back to the primary market in an expansion of demand.
Abstract |Local file in Dropbox|

This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of “impaired’’ policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Dorr, David C.

Longevity Trading: Bridging the Gap Between the Insurance Markets and the Capital Markets

Dorr, David C. (2007) Journal of Structured Finance

Trading in life settlements and the future of the sector – a liquid life settlement market – requires standards to assist in the efficient transfer of risk and assets.
Abstract |Local file in Dropbox|

The recent ability to trade longevity risk through the use of life settlements, whether for speculation, investment, or as a hedge, has far reaching implications for the entire financial sector. Currently, there are two active markets that trade in life settlements: the secondary market and the tertiary market. The secondary life insurance market is where a life insurance policy first enters the marketplace. The tertiary market is where individual policies and portfolios of policies come back into the market and are among between financial institutions. By providing the industry with secure, business-to-business trading platforms specifically designed for life settlement transactions, online platforms address many of the inefficiencies and shortcomings currently facing this industry. Online exchanges lower the fixed costs associated with brokering, underwriting, and purchasing a life insurance policy and consequently provide the opportunity for smaller policies to be brokered in the secondary market. Electronic trading platforms provide the ideal solution to monitor, update, and report upon the requlatory requirements of both buyers and sellers. Transparency and disclosure is probably the most compelling justification for the use of electronic platforms. For securitization to develop and flourish, an electronic exchange will need to be in place to facilitate trades and transactions.

Has Longevity in the U.S. Peaked?

Dorr, David C. (2009) Journal of Structured Finance

Population increase, more expensive healthcare, decource depletion, lower quality food and declining wealth for seniors pull down longevity growth.
Abstract |Local file in Dropbox|

This article enumerates the five factors that influence longevity, with its attendant impact on the life settlement industry. We are at the apex of the longevity growth curve. It may increase slightly over the next 10 years, and then it will drop quite dramatically in the following years. As longevity declines, to the extent professional longevity estimates used by the life settlement industry are reduced at a slower rate than the actual changes in longevity, investors in life settlements may see opportunities to arbitrage those longevity estimates and increase their yields.

Extending the Efficient Frontier through Life Settlements

Dorr, David C. (2008) Journal of Structured Finance

Non-correlation allows life settlements to push the efficient frontier, but not to be exempt from contraction in market liquidity.
Abstract |Local file in Dropbox|

With the increasing acceptance of life settlements as an established asset class, institutional investors have begun to take serious notice that life settlements offer an attractive advantage because of their low correlation to other asset classes. Indeed, since modern portfolio theory is largely based upon the diversification of assets with low or negative correlations, it follows that incorporating pools of life insurance or longevity-linked instruments into a portfolio of diverse assets can significantly enhance a portfolio’s performance. This article goes beyond this basic observation to explain why longevity and mortality-linked instruments will play an increasing role in the future development and construction of institutionally managed portfolios.

Dowd, Kevin

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Elder, Jack E.

Does Revenue Ruling 2009-13 Sound the Death Knell for Life Settlements?

Elder, Jack E. (2010) Journal of Financial Service Professionals

Revenue Ruling 2009-13 reduces the basis in a permanent life insurance contract by an amount equal to the cost of insurance protection, which, in policies with little or no cash value, is basically all the premiums.
Abstract |Local file in Dropbox|

There are a multitude of reasons why a family may no longer need an existing life insurance policy to meet their estate planning goals. In such cases, the policyowner might consider selling the policy for cash to an unrelated third party in the life insurance settlement market rather than allowing it to lapse. However, the IRS recently issued two revenue rulings that have dramatically impacted the life settlement market by increasing the income tax consequences to the sellers upon the sale of life insurance policies. This article provides a summary and an analysis of the examples set forth in Revenue Ruling 2009-13, which addresses the tax results as they relate to the policyowner/seller of a life insurance policy. Additionally, this article tackles the tax consequences of defaulting on a loan for a premium financed policy.

Eremia, Alexander D.

Viatical Settlement and Accelerated Death Benefit Law: Helping Terminal, but Not Chronically Ill Patients

Eremia, Alexander D. (1997) DePaul Journal of Health Care Law

Because it is generally too difficult to determine the life expectancy of a chronically ill person, it is unlikely that VSPs will viaticate or insurance companies will accelerate the policies of such individuals.
Abstract |Local file in Dropbox|

Even those with health insurance often find their coverage insufficient to pay for all necessary medical expenses. In an effort to ease the financial burdens imposed on the terminally or chronically ill, the Health Insurance Portability and Accountability Act of 1996 (HPAA) was amended. As such, a chronically ill individual is one who has been certified by a licensed health care practitioner, within the preceding twelve month period, as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least ninety days due to a loss of functional capacity. An individual may also be deemed chronically ill if she is certified by a licensed health care practitioner within the preceding twelve month period as having a level of disability similar to the level of disability described above, or requiring substantial supervision to protect such an individual from threats to health and safety due to severe cognitive impairment. To reduce the burdens imposed on the government and the family of a chronically ill individual, tax incentives which encourage home health care could be provided to relatives or guardians of the chronically ill individual.

Erkmen, Bilkan

On Life Settlement Pricing

Erkmen, Bilkan (2011) Michigan Journal of Business

Besides technical precision, one should not ignore the role of psychological factors in the development of the life settlement industry.
Abstract |Local file in Dropbox|

Although life settlements as financial products have been in existence and active use in financial markets for quite some time, their pricing has never reached the level of transparency and standardization envisioned by Wall Street. This lack of standardization has been and still is the major roadblock against widespread use of life settlements as investment, diversication and portfolio risk management tools. However, the recent crisis of 2007 has revealed high levels of correlation among existing financial instruments that are in widespread use. This revelation raised an avid interest in new financial instruments that show low correlation to strong market swings. In this respect, life settlements and related products such as death bonds have gained popularity among practitioners and academics alike. This paper proposes a standard pricing framework for life settlements that is consistent with existing methods of risk management and sensitivity analysis widely used in fixed income products.

Evans, Bruce D.

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Fasano, Michael V.

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Fasano, Michael V. (2006) National Underwriter

Life and life settlement industries have more to gain than to lose from each other.
Abstract |Local file in Dropbox|

The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate. A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity. The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other. Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together.

Fleisher, Maria

Stranger Originated Life Insurance: Finding a Modern Cure for an Age-Old Problem

Fleisher, Maria (2010) Cumberland Law Review

Because of all of the risks involved, it is important that all states craft laws that will operate to eradicate harmful STOLI transac- tions, yet provide protection for seniors’ rights to participate in the legitimate life settlement market.
Abstract |Local file in Dropbox|

“There’s no reason to be the richest man in the cemetery. You can’t do any business from there.” - Colonel Sanders

Fontenot, Tim

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Freeman, M. Bryan

Lurking Pitfalls: Due Diligence in Life Settlements Transactions

Freeman, M. Bryan (2007) Journal of Structured Finance

Most industry players acknowledge the obvious pitfalls of difficult-to-estimate life expectancies, yet some fail to perform institutional-quality underwriting (due diligence) on any number of obvious risk areas.
Abstract |Local file in Dropbox|

In the relatively young history of the secondary market for life insurance, a great deal of attention has focused on the due diligence necessary to adequately gauge life expectancies. Still, many investors overlook various other life settlement transaction risks that have potentially significant consequences, including assuring that policies owned by trusts are saleable and otherwise what they seem to be, adequately following the patchwork of vastly differing state laws and regulations, potential misuse of the accredited investor exemptions of settlement regulation, and more. Thoughtfully manage and eliminate life settlement transaction risk through stringent due diligence procedures. Otherwise, even the simplest aspects of such a transaction may prove to be ticking time bombs.

Friedman, Lori

Using Life Settlements to Tap the Value of Hidden Assets

Friedman, Lori (2004) CPA Journal

In select circumstances, life settlements provide a win-win way to receive value in excess of the simple cash value of a policy, while gaining a tax advantage and putting more cash into a business, an acquisition, or an individual’s retirement.
Abstract |Local file in Dropbox|

In the past, the owner of a life insurance policy who no longer wanted to retain the contract had two options: allow it to lapse or surrender the policy. A new option can tap the hidden value of these policies. Under the right circumstances, life settlements provide value in excess of the cash value built up within these policies. In many respects, it works like found money for a company or individuals who might otherwise simply walk away from a policy rather than continue to pay premiums.

Frith, Marlene H.

Life Settlements: Product Flow, Opportunities and Constraints

McNealy, Sean; Frith, Marlene H. (2006) Journal of Structured Finance

In sizing up the life settlement marketplace, the lens that should matter most to those who are following the industry should be the perception of those on the receiving end of the product—senior consumers.
Abstract |Local file in Dropbox|

There is little doubt that the life settlement industry has taken a quantum leap forward over the past six years, and a variety of indicators point to the fact that the industry is poised for remarkable growth over the next few years. Public awareness and acceptance of the product has gained traction as thousands of seniors turn to the secondary market each year to maximize the value of their unwanted life insurance policies. In addition to the fact that institutional investors are fueling the product’s growth, most insiders agree that the marketplace is being propelled by a financially sophisticated, aging population, as they discover that an economically sensible exit strategy from unwanted life insurance policies does indeed exist. Although thousands of life settlement transactions are being sourced through agents, brokers, and providers, much of the market potential remains untapped due to product-flow constraints. Furthermore, approximately 80% of the policies presented to funders never make it to the cash register for various reasons. This article presents a general overview of the life settlement market, examines the dynamics and players involved in product flow, and identifies the main drivers and constraints in sourcing policies at the point of sale.

Gabel, Terrance G.

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

Gao, Jin

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Gardner, Randy

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

Gardner, Rick

Life Settlements: A Legitimate Financial Planning Tool

Gardner, Rick (2005) Journal of Practical Estate Planning

A broker who has direct contracts with many funding companies has a much better opportunity to obtain the best offer for policyholders.
Abstract |Local file in Dropbox|

A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are becoming recognized by planning professionals as a viable financial planning tool. Reasons why a client may want to consider selling an insurance policy include: 1. insurance needs have changed, 2. premiums have become unaffordable or inconsistent with current needs, 3. estate planning goals have changed, 4. cash is needed to fund a different life insurance policy, annuity, or investment, 5. funds are needed for long-term health care, and 6. funds are needed as a source of cash for charitable giving. Values-based case studies are presented. Total premiums paid by the policy owner are nontaxable and are the owner’s cost basis. If the cash surrender value is greater than the total premium paid, the difference would be treated as ordinary income. It is important to choose a life settlement broker who shows a steadfast commitment to doing what is best for the client. A good broker will diligently seek out and negotiate the highest offer.

Gatzert, Nadine

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Gatzert, Nadine (2010) Risk Management and Insurance Review

In the U.S., where policies of individuals above age 65 with reduced life expectancy are traded, while in the U.K. and Germany, with-profits and participating endowment policies with a fixed term are traded.
Abstract |Local file in Dropbox|

In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S.market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market’s unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

Implicit Options in Life Insurance: An Overview

Gatzert, Nadine (2009) Zeitschrift f{"{u}}r die gesamte Versicherungswissenschaft

A trend toward risk management systems based on the fair value concept offers
Abstract |Local file in Dropbox|

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. In this article, we first present the different contract designs in Europe and the United States and point out differences in the contract design. Second, a comprehensive overview and description of implicit options contained in these contracts is provided. With focus on participating contracts, we present contract design, valuation methods, and main results of several recent articles in this field. The study indicates that current developments regarding regulation (Solvency II, Swiss Solvency Test), accounting (IFRS), customer needs, and secondary life insurance markets may lead to a trend away from traditional contract design of participating policies and toward new products that are of a more transparent modular form such as variable annuities. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

Gavrilov, Leonid A.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Gavrilova, Natalia S.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Gelfond, Frederic J.

Open Questions and Recent Guidance Regarding the Life Settlement Industry

Gelfond, Frederic J. (2009) Journal of Structured Finance

The life settlement industry lacks guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind.
Abstract |Local file in Dropbox|

Billions of dollars are being made available by investors from all over the world who are looking to participate in the life settlement industry. For investors who can develop reliable actuarial models and establish long-term business processes, this option presents a means of diversifying a portfolio with non-correlated assets. Despite the number of willing investors and the frequency with which these transactions are occurring, no “cookie cutter” transaction type, or business structure, is predominant in the industry. That is, there is a variety of participants in terms of form of entity, domestic and foreign locale, degrees of active participation in the operation of the “business,” sophistication and needs as to actuarial and business modeling, and expectations regarding buying and holding and securitizing the policies. Among the more significant drivers of this variation in structuring is a given investor’s identification and understanding of the numerous tax issues that are potentially involved. The problem, however, has been the apparent lack of guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind. In May 2009, the Internal Revenue Service released two revenue rulings (Revenue Ruling 2009-13 and Revenue Ruling 2009-14) that answer many of the questions that taxpayers have been asking in this area–or do they?

Giacalone, Joseph A.

Analyzing an Emerging Industry: Viatical Transactions and the Secondary Market for Life Insurance Policies

Giacalone, Joseph A. (2001) Southern Business Review

Accelerated death benefits and the increased regulatory oversight challenges the life settlement industry.
Abstract |Local file in Dropbox|

Traditionally, life insurance has been primarily viewed as a legacy paid to designated beneficiaries after the death of the insured. Increasingly, financial planners, estate planners, and other financial advisors are advising clients to consider their life insurance policies as an underutilized asset that can provide significant financial resources to them while they are still alive.

Giaccotto, Carmelo

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Gibbons, Albert E.

Life Settlements and the Planning Opportunities They Offer

Leimberg, Stephan R.; Gibbons, Albert E. (2003) Estate Planning

Life settlements make the most sense where it is likely that, in spite of significant health impairment, the insured may live beyond the point where continuing to pay premiums is economically feasible and the death benefit is exceeded by the overall (including time value of money) cost, a risk that the life settlement company can afford to take because of the pooling concept.
Abstract |Local file in Dropbox|

An interview with Martyn S. Babitz, an attorney and senior wealth planner with PNC Advisors’ Wealth Planning Group, regarding strategies using life settlements, is presented. The actual amount a policyowner will receive from a viatical or senior settlement will depend on numerous factors, including: 1. the type of policy being sold, 2. the face amount (death benefit) of the policy, and 3. the amount of future premium obligations (which will no longer be the insured’s obligation). The proceeds of an insurance policy held by the insured on his or her life are included in the gross estate of the policyowner if he or she dies owning the policy. To avoid estate tax on these insurance proceeds, the owner may want to give the policy to an irrevocable trust or outright to the intended beneficiary(ies). But, under Section 2035, if the owner dies within three years of such a transfer, the death proceeds will be included in his or her taxable estate. To avoid this problem, the policyowner could sell the policy and at some later date, gift the proceeds of the sale.

Goldman, Dana

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Golec, Joseph

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Graham, Lynford

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Greenberg, Valerie

Life Settlements: An Insurance Planning Tool

Greenberg, Valerie (2004) CPA Journal

Ideal institutional funders are not self-creared companies or trusts that hold investment capital, but world-recognized financial institution who can provide safeguards for advisors and clients.
Abstract |Local file in Dropbox|

Life settlements are a new insurance planning tool for older individuals in which a third party, preferably institutionally funded, purchases a senior’s existing life insurance policy for more than its cash surrender value (CSV). Life settlements are especially valuable when used for trustees. Life expectancy on life settlements can be up to 15 years. When looking at existing life insurance policies, the following situations may be possibilities for life settlements: business succession, trust administration, estate or financial planning, commercial lending, bankruptcy, divorce, charitable giving, and discontinued employee or executive retirement programs. A policy carried on the books as “no value” and ready to be dropped may turn out to be worth a great deal in a life settlement. Other types of policies that can be purchased include term, universal, whole life, variable, and group. Policies can be owned by individuals, trusts, and companies.

Guttery, Randall S.

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

He, Enya (Min)

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Heady, Jared

Regulating the Secondary Market for Life Insurance: Promoting Consistency To Maximize Utility

Heady, Jared (2010) Rutgers Law Review

NA
Abstract |Local file in Dropbox|

A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.

Hendel, Igal

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

Hersch, Warren S.

Coventry Wins Big Against Hancock

Hersch, Warren S. (2011) National Underwriter

NA
Abstract |Local file in Dropbox|

The article discusses the decision of officers of the State Insurance Department in the case of Coventry First LLC against John Hancock Life insurance Co. USA that could affect the life settlements involving conversions of term life insurance policies in New York.

Hoermann, Gudrun

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

Hoesch, Adrian

Predicting Longevity: An Analysis of Potential Alternatives to Life Expectancy Reports

Xu, Jiahua; Hoesch, Adrian (2018) Journal of Retirement

A predictive model combining advances in information and communication technology with innovation in medical science is able to overcome shortcomings of traditional LE reports, such as falsification and inaccuracy as well as low productivity.
Abstract |Local file in Dropbox|

Retirees, pension funds, and the insurance industry have all been negatively affected by the wrongful estimation of longevity. The inaccuracies in current life expectancy (LE) reports primarily result from misinterpretations of the influence of resilience factors on longevity. This study examines different and more accurate measurement metrics to minimize the risks related to biased LE calculations. By using both qualitative and quantitative research approaches, this research develops a new conceptual model: a two-factor-LE-analysis model with a telomere test as a medical basis (physiological factors) and a big data approach to filter the psychological factors to longevity. The authors suggest that the new model, together with the insights of the existing LE-projection methodologies, has considerable potential to improve LE predictions.

Ingraham, Harold G.

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

Jones, Lucretia DiSanto

Keeping a Policy

Jones, Lucretia DiSanto (2005) Advisor Today

A lot of estate value is destroyed through sale of a life insurance contract.
Abstract |Local file in Dropbox|

Reports that insurance and financial advisors in the United States have quantifiable data which illustrates that life settlements may not be an appropriate option for many clients in the United States Details of a life insurance settlement transaction; Assessment of life settlement transaction costs; Importance of estate planning.

Katt, Peter C.

A Life Settlement Mosaic

Katt, Peter C. (2008) Journal of Financial Planning

Most life settlement investments haven’t matured and profits are almost certainly an illusion.
Abstract |Local file in Dropbox|

The author’s life settlement views are formed from his experiences with clients. Since he is solicited by clients and not the other way around, he takes on what is brought to him. The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning. Almost all other possible life settlement situations should result in the policyowner retaining the policy – at least until the policy is near termination. The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. The appetite for doing life settlement transactions has become so great that the industry has convinced itself that life insurance is so mispriced that the policies of insureds in the same health are attractive targets as well.

A Complex Game: The Life Settlement Process

Katt, Peter C. (2011) Journal of Financial Planning

Even if a policy seller knows who will initially own the policy, it is almost certain that policies will change hands several times before the insured passes.
Abstract |Local file in Dropbox|

This article provides details of a life settlement case the author dealt with last year. The author has worked with Mark for 10 years managing three $2 million UL policies insuring him that are owned by an irrevocable trust. Mark, now 80, has been in poor health since the author’s work began with him. The insurance company involved, AB Life, has only fair financial strength ratings that have been declining. Mark’s life insurance is viewed as other investments he has, thus the logic of wishing to pursue selling some of his policies to diversify his perceived risk with AB Life. Mark noticed an ad from a local agent promising results, so he called the agent. The agent hooked up with a settlement broker and they were very lucky that during this period a buyer for AB Life did emerge. This wasn’t lucky for Mark because this meant large commissions would be subtracted from the purchase price.

Assessing Clients’ Life Settlement Offers

Katt, Peter C. (2002) Journal of Financial Planning

The life settlement firm isn’t in the business to determine what is in the best interests of prospective sellers, so policy holders should have an independent financial analysis done before a policy is sold.
Abstract |Local file in Dropbox|

Life settlement refers to the purchase of unneeded life insurance policies. This article examines whether life settlements are likely to be of value to your clients. A discussion of the difference between needed and wanted life insurance seems to miss the point in the context of life settlements that, by definition, only involve insureds who are in much worse health than when they bought their life insurance policies. The only reason this so-called life insurance secondary market can exist is because the subject policy has become much more valuable due to the insured’s poor health. This makes such a policy anything but unneeded.

Keenan, R. Mark

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

Keligian, David L.

Taxation of Life Settlements–Unanswered Questions After Rev. Ruls. 2009-13 and 2009-14

Keligian, David L.; Larsen, Robert W. (2009) Journal of Taxation

While recognizing that Section 72(e) does not address the character of income recognized, the IRS has concluded that such income always must be taxed as ordinary income, even if the policy owner had solely an investment intent with respect to the policy.
Abstract |Local file in Dropbox|

For the most part, the Service’s answer to the question, “what is the tax treatment of the proceeds of a life settlement transaction?,” will be “ordinary income.” Given the lack of useful precedent, the IRS seems to have chosen the result that provides the most amount of revenue, despite the fact that at least some purchasers of such life insurance would appear to have an investment motive entitling them to capital gains treatment.

Kingma, Kenneth W.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

Kohli, Sachin

Pricing Death: Analyzing the Secondary Market for Life Insurance Policies and its Regulatory Environment

Kohli, Sachin (2006) Buffalo Law Review

Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest.
Abstract |Local file in Dropbox|

Life insurance and the way we have typically thought about life insurance will continue to change over the coming years. The early development of a secondary market for life insurance policies and the benefit it has brought policyholders and investors illustrates the want and need for this market. Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest. Given the proper legislative attention, the secondary market can become a great source of value to the everyday life insurance consumer even more so than it is today.

Koutnik, Michael

Long Live Life Settlements: The Current Status and Proposed Direction of the Life Settlement Market

Koutnik, Michael (2013) Marquette Law Review

Coupling a strict judicial adherence to incontestability clauses with state codification of a five-year holding period on newly issued policies would help stabilize the market by providing certainty to investors of validly settled policies while at the same time reducing the financial benefit offered by STOLI transactions.
Abstract |Local file in Dropbox|

The payment of life insurance policy benefits to the insured’s suriving spouse or child is something with which most people are both familiar and comfortable. However, when those benefits are instead paid to a third party investor who has no interest in the insured’s life, some people cry foul. Yet this is the basic premise of the secondary market for life insurance. In this market, insured individuals assign their policy benefits to an investor who agrees to pay the insured a lump sum of money in addition to assuming responsibility for the policy’s premiums. While the underlying concepts that support the secondary market for life insurance policies are not new, the young and imperfectly regulated market has been strained by an increase in supply and demand for these products. Because of the limited guidance within the market, fraud and uncertainty have pervaded many transactions. As a result, many validly settled policies may face challenges in the courts. In an effort to help stabilize and legitimize the secondary market, this Comment recommends coupling a strict judicial interpretation of the incontestability periods contained in many life insurance policies with a five year holding period on newly issued life insurance policies. This framework will help deter fraudulent transactions while promoting certainty among investors.

Kozol, George B.

The Life Settlement Industry Tests State Insurable Interest Rules

Kozol, George B. (2009) Journal of Financial Service Professionals

While this litigation may temporarily destabilize the life settlement business, the increase in supply of policies associated with the aging of the baby boomer generation and the increase in demand for uncorrelated assets will fuel stability and growth in the settlement business.
Abstract |Local file in Dropbox|

As world financial markets become more interdependent, the demand for uncorrelated investments continues to increase. Institutional investors and sophisticated individual investors are searching for investment returns that are not linked to bonds, equities, or commodities. In the late 1990s investment bankers and hedge fund investment managers turned to the secondary market for life insurance to create such an investment class-life settlement-backed securities. The demand for the new securities had been so great, prior to the financial crisis that began last fall, that syndicators and promoters required amounts of life insurance on older-age individuals that exceeded the supply available through normal functioning of the secondary market. The unprecedented demand for life policies on older-aged individuals produced life insurance applications and arrangements that tested the boundaries of state insurable interest laws. This article will explain the tension between life settlement-backed securities and state insurable interest laws. The article also will overview regulatory developments that should assuage this tension.

Lackey, Douglas P.

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

Larsen, Robert W.

Taxation of Life Settlements–Unanswered Questions After Rev. Ruls. 2009-13 and 2009-14

Keligian, David L.; Larsen, Robert W. (2009) Journal of Taxation

While recognizing that Section 72(e) does not address the character of income recognized, the IRS has concluded that such income always must be taxed as ordinary income, even if the policy owner had solely an investment intent with respect to the policy.
Abstract |Local file in Dropbox|

For the most part, the Service’s answer to the question, “what is the tax treatment of the proceeds of a life settlement transaction?,” will be “ordinary income.” Given the lack of useful precedent, the IRS seems to have chosen the result that provides the most amount of revenue, despite the fact that at least some purchasers of such life insurance would appear to have an investment motive entitling them to capital gains treatment.

Lazarus, Eli Martin

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

Leimberg, Stephan R.

Stranger-Owned Life Insurance (‘SOLI’): Killing the Goose That Lays Golden Eggs!

Leimberg, Stephan R. (2005) Estate Planning

In a charitable context, investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitable-minded, and generous donors, which could hurt the charities and trigger a sea change in the way all life insurance is taxed and priced, and in extreme cases encourage criminal activity of the worst kind.
Abstract |Local file in Dropbox|

Stranger-Owned Life Insurance (SOLI) is a rapidly spreading virus that is infecting both individuals and charities. The end result is likely to be a lose-lose-lose situation for the public, the insureds, their families, and the insurance and estate planning communities. In fact, everyone is likely to lose - except the promoter-marketers and third-party investors they assemble to finance what is clearly an end-run around centuries old insurable interest laws. The promoter’s claim is that this arrangement is “a life insurance windfall for charity - without buying a policy or paying anything at all.” These are highly complex and speculative arrangements in which investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitably-minded, and generous donors.

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements and the Planning Opportunities They Offer

Leimberg, Stephan R.; Gibbons, Albert E. (2003) Estate Planning

Life settlements make the most sense where it is likely that, in spite of significant health impairment, the insured may live beyond the point where continuing to pay premiums is economically feasible and the death benefit is exceeded by the overall (including time value of money) cost, a risk that the life settlement company can afford to take because of the pooling concept.
Abstract |Local file in Dropbox|

An interview with Martyn S. Babitz, an attorney and senior wealth planner with PNC Advisors’ Wealth Planning Group, regarding strategies using life settlements, is presented. The actual amount a policyowner will receive from a viatical or senior settlement will depend on numerous factors, including: 1. the type of policy being sold, 2. the face amount (death benefit) of the policy, and 3. the amount of future premium obligations (which will no longer be the insured’s obligation). The proceeds of an insurance policy held by the insured on his or her life are included in the gross estate of the policyowner if he or she dies owning the policy. To avoid estate tax on these insurance proceeds, the owner may want to give the policy to an irrevocable trust or outright to the intended beneficiary(ies). But, under Section 2035, if the owner dies within three years of such a transfer, the death proceeds will be included in his or her taxable estate. To avoid this problem, the policyowner could sell the policy and at some later date, gift the proceeds of the sale.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Life Settlement Transactions: Important Tax and Legal Issues to Consider

Magner, James C.; Leimberg, Stephan R. (2007) Estate Planning

Although the number of life settlement transactions has increased trmendously in recent years, there are still many significant and unresolved tax and legal issues that advisors and fiduciaries must consider.
Abstract |Local file in Dropbox|

Although the sale of a life insurance policy to a life settlement company would seem to be a relatively straightforward transaction, advisors and policy owners may be surprised at the number of documents buyers typically include in their closing package. Advisors will generally find that life settlement companies are unwilling to make substantive modifications to their documents, and there may be valid business reasons for this position. Even if changes are not accepted, there are a number of important issues the advisor should consider in the document review process. Advisors should complete a thorough credit check on the provider and funder, and ask whether the policy is being bought to be sold or to be held. Advisors, particularly those who sign the policy owner’s tax return, should not overlook the fact that life insurance contracts are unique assets subject to special tax rules. Also, loan interest should be carefully reviewed.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

Lempereur, Douglas R.

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Lizzeri, Alessandro

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

Lowe, J.D. Jeffrey D.

Regulating All Life Settlements as Securities: The New Age of the Life Settlement Investment Market

Casey, Brian T.; Lowe, J.D. Jeffrey D. (2011) Journal of Structured Finance

Although the Life Settlements Task Force recommendations have merit and have gained momentum with the SEC and some members of Congress, it is unlikely to see a modification to the definition of “security” to include life settlements in the very near future.
Abstract |Local file in Dropbox|

The life settlement investment market (“LSIM”) has been characterized as a “wild west” type investment environment over the course of the last decade. With very little federal oversight, the market flourished during the late ’90s during the viatical settlement era and well into the 2000s in the form of the life settlement market. The financial meltdown that gripped the United States in late 2007 and continues today has garnered a call to action for the federal government to enact legislation to protect investors from abuses apparent in the investment community. It appears now that the legislative call to action may formally make its way into the LSIM. The Life Settlements Task Force (“LSTF”), created by the Securities and Exchange Commission (“SEC”) in August 2009, was established to investigate and examine issues in the LSIM and to advise the SEC whether market practices in and regulatory oversight of the LSIM could be improved. This article outlines the basic findings of the LSTF as well as detailing the potential repercussions of the federal government acting upon those recommendations.

MacMinn, Richard D.

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

MacMinn, Richard D.; Zhu, Nan (2017) Journal of Risk and Insurance

Conventional longevity forwards exhibit relatively inferior performance in terms of hedging due to the nonnegligible basis risk between the general population and the settled subgroup, whereas biomedical research-backed obligations overcome this issue by providing returns that are strongly positively correlated with the specific longevity shock.
Abstract |Local file in Dropbox|

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument–the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

Magner, James C.

Life Settlement Transactions: Important Tax and Legal Issues to Consider

Magner, James C.; Leimberg, Stephan R. (2007) Estate Planning

Although the number of life settlement transactions has increased trmendously in recent years, there are still many significant and unresolved tax and legal issues that advisors and fiduciaries must consider.
Abstract |Local file in Dropbox|

Although the sale of a life insurance policy to a life settlement company would seem to be a relatively straightforward transaction, advisors and policy owners may be surprised at the number of documents buyers typically include in their closing package. Advisors will generally find that life settlement companies are unwilling to make substantive modifications to their documents, and there may be valid business reasons for this position. Even if changes are not accepted, there are a number of important issues the advisor should consider in the document review process. Advisors should complete a thorough credit check on the provider and funder, and ask whether the policy is being bought to be sold or to be held. Advisors, particularly those who sign the policy owner’s tax return, should not overlook the fact that life insurance contracts are unique assets subject to special tax rules. Also, loan interest should be carefully reviewed.

Martin, Susan Lorde

Life Settlements: The Death Wish Industry

Martin, Susan Lorde (2014) Syracuse Law Review

There is nothing to be gained by turning life insurance into a financial product that creates wealth for financiers who merely move money around, perverting the purpose of life insurance.
Abstract |Local file in Dropbox|

… So, the industry shifted to buying life insurance policies insuring the lives of people with other terminal illnesses; then, to buying policies of old people who were not terminally ill; then, to encouraging older people to buy insurance policies for the express purpose of selling them to investors; and finally, to bundling those policies together, securitizing them, and selling pieces of the bundles to investors. … On his application, Rucker said the policy was not going to be transferred to investors, and investors were not going to pay the policy premiums. … The court noted that incontestability clauses operate as statutes of limitations that keep insurance companies from continuing to collect premiums and reap profits until they have to pay out on policies, which they will refuse to do by claiming fraud or lack of insurable interest. … As in most of them, the new Arizona statute provides that insureds may not enter into life settlement contracts within two years of the issuance of policies, with exceptions similar to those in the New York statute. … Arizona’s statute suggests legislators there, like legislators in almost all other states with similar statutes, had a great deal of concern about promoters of life settlement agreements engaging in fraud and encouraging insureds and investors to enter into transactions that were not appropriate for them. … States became more amenable to various gambling enterprises because they were a source of revenue for the government. … Although life insurance companies oppose life settlements, they also provide the policies for those arrangements by encouraging consumers to purchase whole life policies (and their variants) instead of term insurance. … Other risks for investors in life settlement funds include: liquidity risk because cash outflows to pay premiums and fund redemptions occur regularly, whereas cash inflows from death benefits and new investments are unpredictable; policy availability risk; operational risks including litigation that can cost more than the death benefits; credit risk caused by the possible failure of the insurance carriers that underwrite the policies; and regulation risk because of changes in state and federal laws.

Betting on the Lives of Strangers: Life Settlements, STOLI, and Securitization

Martin, Susan Lorde (2010) University of Pennsylvania Journal of Business Law

Life insurance companies should reconsider the amount they pay out in surrender value so that life settlement offers would not look so attractive.
Abstract |Local file in Dropbox|

Life insurance serves the important purpose of providing a means for families and businesses to survive the premature death of a person whose support they require to maintain themselves. Over time, life insurance has become a much more sophisticated financial product incorporating savings plans, mutual fund investments, and securitizations. This article recounts the history of lfe insurance including the development of the insurable interest doctrine. It describes life settlements, especially strangeroriginated life insurance (STOLI) policies, which represent a particular abuse of the purpose of life insurance. The article discusses the securitization of pools of life insurance policies, reminiscent of the securitization of sub-prime mortgages. Then state and federal attempts at regulation and a variety of lawsuits are summarized. The article concludes that life insurance is such an important protection for families and businesses that its availability for its primary purpose should not be compromised by becoming the basis for complicated, misunderstood, and, in some cases, fraudulent financial products.

Mason, Joseph R.

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Mathews, Eryn

STOLI on the Rocks: Why States Should Eliminate the Abusive Practice of Stranger-Owned Life Insurance

Mathews, Eryn (2007) Connecticut Insurance Law Journal

STOLI creates dangerous financial and legal risks for purchasers, investors and life insurance companies, and also raises serious ethical concerns.
Abstract |Local file in Dropbox|

The life insurance market is a burgeoning field of sophisticated investment transactions. A life insurance policy, traditionally an illiquid asset, has developed into an asset-backed security which has proved quite profitable to investors and insureds alike. These transactions allow insureds under certain circumstances to sell their policies to investors. The development of this secondary market has injected competition into the life insurance business and resulted in better products with more options for consumers.

Mazonas, Peter Macrae

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Mccullough, Kathleen A.

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

McNealy, Sean

Life Settlements: Product Flow, Opportunities and Constraints

McNealy, Sean; Frith, Marlene H. (2006) Journal of Structured Finance

In sizing up the life settlement marketplace, the lens that should matter most to those who are following the industry should be the perception of those on the receiving end of the product—senior consumers.
Abstract |Local file in Dropbox|

There is little doubt that the life settlement industry has taken a quantum leap forward over the past six years, and a variety of indicators point to the fact that the industry is poised for remarkable growth over the next few years. Public awareness and acceptance of the product has gained traction as thousands of seniors turn to the secondary market each year to maximize the value of their unwanted life insurance policies. In addition to the fact that institutional investors are fueling the product’s growth, most insiders agree that the marketplace is being propelled by a financially sophisticated, aging population, as they discover that an economically sensible exit strategy from unwanted life insurance policies does indeed exist. Although thousands of life settlement transactions are being sourced through agents, brokers, and providers, much of the market potential remains untapped due to product-flow constraints. Furthermore, approximately 80% of the policies presented to funders never make it to the cash register for various reasons. This article presents a general overview of the life settlement market, examines the dynamics and players involved in product flow, and identifies the main drivers and constraints in sourcing policies at the point of sale.

Mendelsohn, Jon B.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

Mendoza-Resco, Carmen

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Miller, Cathleen L.

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

Miller, Dean Edward

Life Settlements and Trust Accounts: A Possible Modification of the Trustee’s Responsibility?

Miller, Dean Edward (2002) Banking Law Journal

In case where a substantial portion of the assets of a trust is an unmatured life policy, a trustee subject to the Uniform Prudent Investor Act must consider whether it is oblidged, by its fiduciray duty, to seek a buyer for that policy.
Abstract |Local file in Dropbox|

According to the author, developing trust law may now impose new duties upon the trustees of trusts holding life insurance policies; one salient cause of this development of trust law is the emergence of the life settlement. This would seem to mean, at the least, that in numerous instances a bank or trust company serving as trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement.

Miller, Robert G.

Consider Life Settlements As An Option For Divesting Life Policies

Arenson, Steven; Miller, Robert G. (2003) National Underwriter

A life settlement can be the means to a client’s financial planning end, delivering the highest economic value and the best solution for changing needs.
Abstract |Local file in Dropbox|

Provides tips in divesting life policies in the U.S. Partial-surrender of the policy; Practice of non-forfeiture provisions; Conversion of the policy into a gift.

Moenig, Thorsten

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Monjas-Barroso, Manuel

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Mott, Antony R.

New Swaps to Hedge Alpha and Beta Longevity Risks of Life Settlement Pools

Mott, Antony R. (2007) Journal of Structured Finance

Whereas life settlements don’t always provide an obvious advantage to insurance companies, longevity derivatives do allow the insurance industry to identify, concentrate, and hedge the risks to insurers, perhaps more effectively than the insurers can do themselves.
Abstract |Local file in Dropbox|

The promise of high profits uncorrelated to the stock market draws prospective investors to life settlements. Spared perhaps from correlation risk, investors face other obvious and not-so-obvious risks including two types of longevity risk. The cost to hedge longevity risk has traditionally been exorbitant because those who take the other side are not themselves hedging. Newly engineered longevity swaps may provide lower cost hedging primarily because they are designed to place together two parties with opposite hedging needs.

Nurnberg, Hugo

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

O’Dea, B.A. Brian A.

The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s Hidden Value

Doherty, Neil A.; O’Dea, B.A. Brian A.; Singer, Hal J. (2004) Marquette Elder’s Advisor

Access to complete and current information regarding their secondary market options would allow policyholders to make optimal decisions regarding their insurance coverage and enable the secondary market to reach its full potential in terms of the welfare gains if provides to consumers.
Abstract |Local file in Dropbox|

Increasingly common usage of the secondary market for life insurance policies is discussed in this article which explains the secondary market and describes the benefits of viatical and life settlement firms as well as accelerated death benefits. Changing regulations of the secondary market and suggested ways for counselors to assist clients in specific circumstances are included.

Ortiz, Carlos E.

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

Parankirinathan, Kiri

The Life Settlement Market is an Opportunity

Bakos, Tom; Parankirinathan, Kiri (2006) Journal of Structured Finance

Insurers and reinsurers should participate in the life settlement market, through e.g. purchasing impaired policies as a hedge against the increased mortality risk, to drive an orderly and reasonable market development for the benefit of all involved including themselves.
Abstract |Local file in Dropbox|

Life settlements provide life insurance policy owners a viable alternative to surrendering the life policy. The authors address the misunderstandings of many early entrants regarding the inner workings of life insurance products, the terminology, and the applicability of certain actuarial assumptions. The authors point out that insurance companies, rather than portraying life settlement transactions as an attack on policyholder equity, ought to take more responsibility in creating a disciplined and orderly secondary market for life insurance policies that can benefit their policyholders. A mature life settlement market–with attention paid to consumer needs, a technically correct understanding of the risks, responsible pricing, and maintenance of high ethical standards–will thrive and every participant will be well served. Who is better equipped to do this than the insurance companies?

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

Pearson, Levi

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

Pecore, Anthony

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Perera, Nemo

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

Risk Mitigation for Life Settlements

Perera, Nemo; Reeves, Brian (2006) Journal of Structured Finance

Although rating agency requirements and debt holder covenants mandate basic risk-transfer protocols to be utilized, savvy investors actively deploy sophisticated risk transfer mechanisms that combine equity and insurance, to exploit investment value in life insurance assets and create above-par returns.
Abstract |Local file in Dropbox|

Investors seeking new structures for acquiring policies in the life settlement market encounter several underlying risks unique to the asset class. Those risks, described in this article, include contestability risk, missing body risk, insurable interest risk, incorrect-purchase-price risk, life insurance company credit risk, cost-of-insurance risk, and longevity risk. Some risks can be easily mitigated, but others require more complicated risk transfer mechanisms that combine financial products with insurance products. These products range from contestability coverage to more sophisticated mortality risk transfer constructs that blend equity derivative products with property casualty insurance. As the life settlement market evolves, risk mitigation will play an increasing role in reducing volatility and enabling predictable returns to allow for more institutional capital participation. Knowledge about the risks and the available risk mitigation solutions becomes a must for prospective investors interested in entering into the life settlement market.

Perez, Jessica Maria

You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly

Perez, Jessica Maria (2002) Elder Law Journal

Despite criticism associated with the viatical industry of the 1990s, the senior settlement industry of the new millennium is a modern and improved system, providing the elderly with a viable financial alternative for long-term care.
Abstract |Local file in Dropbox|

As seniors struggle to keep pace with medical care costs and other expenses, many must look to alternative sources of financial freedom. Senior settlement agreements, through which a senior may sell her life insurance policy to a third party for a percentage of its future value, may provide one such alternative. In this Note, Jessica Maria Perez explores the history of senior settlement agreements from their birth as sisters to similar agreements made by the chronically ill, to the present in which they are increasingly entered into by healthy seniors. Perez analyzes the positive and negative aspects of these agreements from basic economic risk to ethical issues to tax implications. She analyzes recent regulatory developments in this area, including the Viatical Settlements Model Act and various state statutes. Perez recommends increased regulation at the state level, encouraging states to adopt the Model Act. She also recommends that these transactions be made tax-exempt and that attorneys play a greater role in the making of senior settlements. With these reforms, Perez suggests that the senior settlement agreement can be a safe and effective method by which seniors can realize financial freedom.

Piontek, Steve

It’s Time To Ban IOLI

Piontek, Steve (2005) National Underwriter

Investor-owned life insurance, which moves far from the noble basis of protecting loved ones, inevitably cheapens the concept and should be banned.
Abstract |Local file in Dropbox|

It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners (NAIC) took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution. What is pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment. IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.

Poe, Stephen

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Quinn, Sarah

The Transformation of Morals in Markets: Death, Benefits, and the Exchange of Life Insurance Policies

Quinn, Sarah (2008) American Journal of Sociology

The life insurance industry incubated specific technologies of commensuration, such as actuarial tables and contractual structures, as well as the notion that life insurance is not simply a rational phenomenon but also a moral one.
Abstract |Local file in Dropbox|

This article adopts an institutional approach to describe the changing secondary market for life insurance in the United States. Since the 1990s, this market, in which investors buy strangers’ life insurance policies, has grown in the face of considerable moral ambivalence. The author uses news reports and interviews to identify and describe three conceptions of this market: sacred revulsion, consumerist consolation, and rationalized reconciliation. Differences among the conceptions are considered in view of the institutional legacy of life insurance and its success in organizing practices, perceptions, and understandings about markets and death. From this case, the author draws implications for analyses of morals in markets, an important and emergent topic within economic sociology.

Reed, Barry

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

Reeves, Brian

Risk Mitigation for Life Settlements

Perera, Nemo; Reeves, Brian (2006) Journal of Structured Finance

Although rating agency requirements and debt holder covenants mandate basic risk-transfer protocols to be utilized, savvy investors actively deploy sophisticated risk transfer mechanisms that combine equity and insurance, to exploit investment value in life insurance assets and create above-par returns.
Abstract |Local file in Dropbox|

Investors seeking new structures for acquiring policies in the life settlement market encounter several underlying risks unique to the asset class. Those risks, described in this article, include contestability risk, missing body risk, insurable interest risk, incorrect-purchase-price risk, life insurance company credit risk, cost-of-insurance risk, and longevity risk. Some risks can be easily mitigated, but others require more complicated risk transfer mechanisms that combine financial products with insurance products. These products range from contestability coverage to more sophisticated mortality risk transfer constructs that blend equity derivative products with property casualty insurance. As the life settlement market evolves, risk mitigation will play an increasing role in reducing volatility and enabling predictable returns to allow for more institutional capital participation. Knowledge about the risks and the available risk mitigation solutions becomes a must for prospective investors interested in entering into the life settlement market.

Reinstein, Alan

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

Richmond, Douglas R.

Investing with the Grim Reaper: Insurable Interest and Assignment in Life Insurance

Richmond, Douglas R. (2012) Tort Trial & Insurance Practice Law Journal

NA
Abstract |Local file in Dropbox|

Stranger-owned life insurance, commonly known by the acronym STOLI, has for several years been a key practice of the so-called life settlements industry. STOLI generally describes the purchase of life insurance by an insured with the intent of assigning ownership of the policy along with its death benefits to investors who do not have an insurable interest in the insured’s life. State statutes regulating STOLI arrangements often define STOLI in this way. This is not a perfect description or definition of STOLI, however, because life settlement companies may purchase life insurance policies from individuals over the age of 65 who have remaining life expectancies of six to twelve years (although in some instances people with longer life expectancies may be considered), but who did not originally purchase their policies with the intent to transfer ownership of them to strangers. Insureds in this second category may seek to sell their policies because of shifts in personal financial preferences or due to changes in their circumstances, such as disability, divorce, retirement, or various forms of financial distress. This is still strangerowned life insurance, even if the original intent to transfer policy ownership is missing. […]of these differences, and while the mechanics of STOLI transactions may vary-they commonly involve major cash payments to insureds by intermediaries or investors, the formation of irrevocable life insurance trusts, and premium financing, among other techniques9- STOLI is unquestionably more an investment vehicle than an insurance transaction. The basic concept is that the life settlement company that purchases the policy will pay the insured an amount greater than the cash surrender value of the policy but much less than the death benefit, will thereafter keep the policy in force until the insured dies, and will then profit by collecting the difference between the death benefit and the combination of the sum paid to the insured and the premiums paid to keep the policy in force.11 Life settlements may be securitized, such that investors who purchase the resulting bonds profit in essentially the same fashion.

Rios, Damien

An Introduction to the Use of Viatical and Life Settlements

Rios, Damien (2004) Estate Planning

Before entering into a viatical settlement contract, policyowner and the policyowner’s advisors should consider all options available to the policyowner, fully understand the process involved in a viatical settlement, and know what rights the policyowner has under applicable law and the governing documents.
Abstract |Local file in Dropbox|

The viatical settlement market provides a valuable alternative to policyowners who no longer wish to keep their life insurance policies, but are not satisfied with the financial return that may be available if the policyowner surrenders the policy to the insurance company. The policyowner or the policyowner’s advisors should determine whether the viatical settlement is a regulated transaction under applicable state law and whether the purchaser must be licensed to purchase the policy. If a license is required, the policy-owner or advisor should verify that the purchaser has the appropriate license by either requesting a copy of the license from the purchaser or contacting the division of insurance in the appropriate state. Lastly, the policyowner should consult his or her advisors concerning the tax consequences of the viatical settlement, the effect that the receipt of the viatical settlement proceeds may have on the policy-owner’s eligibility for government assistance, and any effect the viatical settlement may have on the policyowner’s rights against creditor’s claims.

Roth, Ronald M

CPAs and Life Settlements: Due Care, Competence, and Objectivity

Roth, Ronald M (2004) CPA Journal

A life settlement can remove the policy from the taxable estate, avoiding application of the three-year rule under IRC section 2035, in order to transfer additional assets tax-free to descendents.
Abstract |Local file in Dropbox|

In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products.

Russ, Jochen

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Russell, David T.

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

Sabes, Jon R.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

Sager, Thomas W.

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

Salani, Sergio S.

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

Schmeiser, Hato

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

Schmidt, Paula

Accelerated Death Benefits, Viatical Settlements,and Viatical Loans: Options for the Terminally III

Schmidt, Paula (1997) Journal of Actuarial Practice

Because of issues regarding estate tax and estate/inheritance tax treatment of the death benefit remaining after acceleration. and other issues, some insurance companies have been waiting to initiate and introduce accelerated benefits.
Abstract |Local file in Dropbox|

There are three options available for terminally ill insureds who are interested in accessing all or part of the face value of their life insurance policies: through the life insurance company (accelerated death benefits), through a viatical company (a viatical settlement), or through a viatical loan company (a viatical loan). This paper explores the definitions and tax regulations, calculations, and the claims process associated with accelerated death benefits and via tical settlements and loans.

Schmutz, Bryan P.

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Schultz, Denise M.

Angels of Mercy or Greedy Capitalists? Buying Life Insurance Policies from the Terminally Ill

Schultz, Denise M. (1996) Pepperdine Law Review

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Abstract |Local file in Dropbox|

In response to the financial hardships burdening AIDS patients and other terminally ill individuals, the “viatical settlement” industry has emerged. Although as a general rule the purchaser of an insurance policy must possess an insurable interest in the insured’s life, controversy exists as to whether a person without an insurable interest, such as a viatical settlement company, may obtain an insurance policy by assignment. This goal is accomplished by requiring viatical settlement companies to procure a witnessed, signed statement from the terminally ill individual attesting that the viator freely consents to the contract, acknowledges the illness, understands the risks and benefits of the settlement, and releases all medical records to the viatical company. Opponents contend that licensing requirements stifle a terminally ill individual’s opportunity to take full advantage of the viatical settlement industry by excluding willing purchasers from the market. The ruling addressed a taxpayer’s irrevocable assignment of a life insurance policy to a viatical settlement company for approximately sixty-three percent of the policy’s face value. The Service ruled that amounts received from the assignment of the life insurance policy to the viatical settlement company were “not amounts received under a life insurance contract by reason of the death of the insured.

Schwartz, Jesse M.

Life Settlements: Pricing Challenges and Opportunities

Schwartz, Jesse M.; Wood, Timothy O. (2008) Journal of Structured Finance

In the case of life-settlement assets, the availability of these margins may be squeezed as a result of the high demand for investments uncorrelated to the performance of the economy.
Abstract |Local file in Dropbox|

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters’ assessment relative to the investors’ risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

Scofield, Barbara

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Scott, Clifford D.

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

Seitel, Craig L.

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Inside the Life Settlement Industry: An Institutional Investor’s Perspective

Seitel, Craig L. (2006) Journal of Structured Finance

Providers assess policies’ market value and assemble prime investment portfolios, while agents and brokers identify insureds wanting to sell their policies in the first place.
Abstract |Local file in Dropbox|

The life settlement industry offers a combination of challenges and opportunities for domestic and international investors in an uncorrelated asset class with promising returns. Although the life settlement supply chain is characterized by a variety of interdependent players including, financial planners, life settlement brokers, actuarial experts, verification agents, escrow agents and others, the provider’s role is the point at which the true economic value of the consumer’s life insurance policy is established through pricing and competitive bidding. New providers entering the marketplace can expect to face a variety of operational challenges from sourcing employees to sourcing product flow. This article explains the integral role of the provider through which institutional capital enters the marketplace, examines the challenges of attracting capital, and discusses the administrative issues involved in setting up shop.

A Provider’s Reflection from Inside the Life Settlement Industry: Understanding the Chaotic Environment

Seitel, Craig L. (2009) Journal of Structured Finance

While many investors were hurt by life expectancy adjustments, new investors stand to benefit from the more conservative analysis.
Abstract |Local file in Dropbox|

Now nine years into its life cycle, the life settlement industry is no longer a fledgling, early-stage sector of the financial community. Regulated by 30 state insurance departments (including Puerto Rico) and, in part, the Financial Industry Regulatory Authority (FINRA), this industry has validated itself by creating a secondary market for life insurance policies to the benefit of consumers as well as an asset class for investors that is uncorrelated with the credit and investment risk of the typical money manager’s portfolio. That said, the second half of 2008 through 2009 thus far has proven to be the most challenging of times this industry has experienced. For reasons brought about by the global economy as well as reasons indigenous to this industry, the life settlement community finds itself in a state of chaos. This article reviews the reasons behind such turmoil and examines the confluence of external and internal forces resulting in this financial perfect storm. It also explores the potential remedies and other factors that provide hope that this industry will not only survive, but prevail, in the long run.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

An Update on the Life Settlement Industry: Recent Challenges and Tasks Ahead

Seitel, Craig L. (2010) Journal of Structured Finance

Regulation in the form of FINRA and the SEC helps validate the life settlement industry, now lacking liquidity, and should create a greater comfort level for potential investors.
Abstract |Local file in Dropbox|

Now more than 10 years into its life cycle, the life settlement industry is facing challenges whose outcomes will determine its very existence. This industry experienced robust and even exponential growth during the first decade of the new millennium. Its vitality and prospects for future growth are in question today. That said, the underlying fundamentals of this industry from an investor’s perspective remain economically sound and compelling. This article reviews the current state of the life settlement industry and explores the ongoing economic impact resulting from the financial crisis, regulatory developments, and industry dynamics. It also explores various future scenarios and potential outcomes as the industry continues to evolve.

Inside the Life Settlement Industry: A Provider’s Reflections on the Challenges and Opportunities

Seitel, Craig L. (2007) Journal of Structured Finance

Industry maturation means shifting providers’ focus from managing the supply chain to creating a value chain.
Abstract |Local file in Dropbox|

As a portal to institutional investors and a gateway to settlement brokers, the provider plays a pivotal role in the secondary market supply chain. This article discusses key issues and challenges faced by providers in the current life settlements market. Attracting stable sources of financing is “job one” and critical to the success of a provider company. From the regulators’ and legislators’ perspective, a primary focus will center on transaction transparency and disclosure to the consumer of all commissions paid. Operational challenges include staying abreast of licensure and compliance issues, developing teams of highly skilled life settlement professionals, credentialing industry professionals, developing robust data analytics and data management capabilities, addressing privacy issues, conducting due diligence on investors, and educating novice brokers so as to better manage product flow. As the life settlements industry matures, sustaining the momentum will require a shift away from “managing the supply chain” to “creating a value chain” that emphasizes greater value and transparency to the consumer.

Seltzer, Steven

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

Shapiro, David H.

Vulture Capital Tax Manual-A Brief Guide to the Tax Issues Associated with Financial Investments in Life Settlements

Shapiro, David H. (2007) Journal of Taxation of Financial Products

A proper determination regarding the source (U.S. or foreign) of Sales Income and Death Benefit Income is a critical component of the U.S. tax analysis.
Abstract |Local file in Dropbox|

For several years, terminally ill individuals have been able to sell the entitlement to death benefits associated with their life insurance contracts to investors for cash. More recently, a market has developed that allows healthy individuals to sell their life insurance policies to investors for cash amounts exceed ing the policies cash surrender value. This practice has come to be known simply as the lifetime settlements of life insurance contracts. It would appear that life settlement investing is slowly emerging as a popular hedge fund strategy that is uncorrelated with other strategies and markets. State regulators have begun to focus their attention on these arrangements to help ensure that they are undertaken within certain parameters. Investors (and their tax advisors!) would similarly welcome clarity from the IRS with respect to the numerous tax issues involved. In the meantime, investors can only structure and manage their life settlement investments with careful attention paid to the uncertainty arising from the tax variables.

Sheridan, Matthew

Lessons from the World of Micro Longevity

Sheridan, Matthew (2014) Pension and Longevity Risk Transfer for Institutional Investors

Life settlements provide useful, real-world lessons – such as awareness of informational asymmetries and the use of big data techniques – in managing longevity risk, many of which are applicable to the developing macro-longevity markets.
Abstract |Local file in Dropbox|

The pension risk transfer market has a bottleneck in its inability to attract sufficient institutional investor interest as longevity risk takers. Having spent many years at a large institution as part of a team investing directly in longevity risk via the life settlements market, the author encountered many of the challenges of managing this nascent risk type. The pension risk transfer market often seems at pains to distance itself from its life settlements cousin; however, in many ways “longevity is longevity” and the experience of dealing with the challenges in life settlements can offer valuable insights to investors across the full spectrum of the risk class. The article is aimed at capital markets investors considering longevity as an investable asset. It offers a discussion of the current perception of longevity risk, as well as a list of hints and warnings derived from direct market experience.

Sherman, Thomas D.

Common Securities Law Questions in the Life Settlements and Life Insurance Premium Finance Industries

Casey, Brian T.; Sherman, Thomas D. (2008) Journal of Structured Finance

Whether a life insurance-linked contract is a security or not depends on contract properties plus the definition on securities from federal and states’ laws.
Abstract |Local file in Dropbox|

This article examines three securities-related questions frequently encountered in the life settlements, or secondary life insurance, and the life insurance premium finance markets: 1) Life insurance policy put or call agreement: Is it a security? 2) A fund that owns life-settlement-acquired life insurance policies of life insurance premium finance loans: Is it an investment company? 3) Life insurance premium finance loan: Is it a security? The questions are analyzed only under the federal securities laws, but a similar analysis would obtain under most states’ securities laws where they apply.

Are Life Settlements a Security?

Casey, Brian T.; Sherman, Thomas D. (2007) Journal of Structured Finance

Life settlement, whether with fixed or variable underlying policies, may involve transaction of securities and hence be subject to security regulations; however, exemption can be achieved through proper structuring of the sale.
Abstract |Local file in Dropbox|

Given the extraordinary growth of the U.S. life settlement industry over the last decade, it is not surprising to find increased attention and scrutiny by academicians, the media and legal enforcement authorities–including, among others, state and federal securities regulatory and self-regulatory organizations. The securities laws regulators argue that investments in all forms of life settlement transactions involve the sale of securities, and that the full spectrum of securities laws applies. For the most part, they may be right. In discussing the pertinent securities-related issues surrounding life settlements, there are three fundamental questions to be addressed: 1) Does the sale of the life insurance policy to a passive investor that relies on others to conduct due diligence, price the policy, carry out the transaction, and perform follow-up services involve the sale of a”security" under the Securities Act of 1933, as amended (the “1933 Act”)? 2) Do the “registration” requirements under the 1933 Act apply? 3) Do sales activities in connection with the sale of the life insurance policy trigger any broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”)? This article concludes that the sale of the entire interest in an in-force life insurance policy to a passive investor may very well involve the sale of a security. The sale can be structured so that it is exempt from the registration requirements of state and federal laws. However, the state and federal anti-fraud provisions will apply to the transaction; and any person effecting the sale, particularly if compensated on the basis of the size of a successful sale, might be required to register with the SEC (and the applicable state) as a broker-dealer and be licensed as a security salesperson by the NASD.

Shoemaker, Bill

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Simon, Larry A.

Reaching Affluent Senior Life Settlement Prospects

Simon, Larry A. (2005) National Underwriter

Do: use photos of seniors enjoying their wealth, include clippings of articles you have written for local publications; don’t: ignore state licensing rules, violate state life settlement advertising filing requirements.
Abstract |Local file in Dropbox|

Selling a life insurance policy through a life settlement may be a major step for a policyholder, even if the policyholder is a high-net-worth client. Marketing life settlements to this group can present a unique set of challenges. These guidelines should help: 1. Members of this group are very careful about those with whom they do business. 2. Hard sells rarely work on affluent seniors. 3. Photos send a message. 4. Seniors have time to read. 5. Before publishing or distributing advertising or marketing materials, and when designing your Web site, always give careful consideration to legal and regulatory requirements in the states in which your information will be disseminated. 6. Licensing requirements also should be considered carefully.

6-Month Life Settlement Outlook: More Growth, More Regulation

Simon, Larry A. (2008) National Underwriter

A push for more uniform standards that effectively address STOLI and aim to stop fraud is expected, protecting both consumers and the professionals aiding seniors in financing planning goals.
Abstract |Local file in Dropbox|

The life settlement market will continue to expand and evolve in the second half of 2008. Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market. Since introduction of the National Conference of Insurance Legislators (NCOIL) and National Association of Insurance Commissioners (NAIC) model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry. This includes 5 bills based on the NAIC model and five based on the NCOIL model.

Life Settlements: Means for Cashing In Key-Person Policies

Simon, Larry A. (2005) Financial Executive

When an insured key person retires or resigns, instead of cancelling its corporate-owned policy and taking the cash-surrender value, if any is remaining, the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well.
Abstract |Local file in Dropbox|

When an insured key person retires or resigns, the company often cancels its corporate-owned policy and takes the cash-surrender value, if any is remaining. Life settlements provide a viable and attractive option: the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well above the cash-surrender value. In a nutshell, a life insurance policyholder sells the benefits of the policy to an investor. Most investors do not directly negotiate with policyholders; rather, they provide financing for life settlement companies that facilitate buying the policies. Policy owners should insist that their agents and brokers perform due diligence by gathering information from several competitive life settlement companies.

Helping Your Clients Sell Unneeded Policies

Simon, Larry A. (2004) National Underwriter

A good settlement candidate has an universal insurance policy with above half a million coverage and a life expectancy between 2 to 10 years.
Abstract |Local file in Dropbox|

The majority of life insurance policyholders let their policies lapse or surrender the policies for a minimal cash value. The wealth lost as a result of these policy surrenders is significant. The National Association of Insurance Commissioners, Kansas City, MO, estimates that in 1996, for example, nearly $1.5 trillion in life insurance face amount lapsed or was canceled by policyholders. Today, the life settlement market is giving financial advisors the means to help policy owners extract the wealth trapped in unneeded life insurance policies. Unlike viaticals, life settlements are based on the proposition that some insured individuals no longer want, need or can afford their coverage. Life settlements aren’t for everyone. A good candidate typically has $500,000 or more in universal life coverage. Life settlements are designed for people who are not suffering from a life-threatening or catastrophic illness and whose life expectancy is about 2 to 10 years.

Singer, Hal J.

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s Hidden Value

Doherty, Neil A.; O’Dea, B.A. Brian A.; Singer, Hal J. (2004) Marquette Elder’s Advisor

Access to complete and current information regarding their secondary market options would allow policyholders to make optimal decisions regarding their insurance coverage and enable the secondary market to reach its full potential in terms of the welfare gains if provides to consumers.
Abstract |Local file in Dropbox|

Increasingly common usage of the secondary market for life insurance policies is discussed in this article which explains the secondary market and describes the benefits of viatical and life settlement firms as well as accelerated death benefits. Changing regulations of the secondary market and suggested ways for counselors to assist clients in specific circumstances are included.

The Benefits of a Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Real Property, Probate and Trust Journal

The secondary market of life insurance provides liquidity and enhances policy value, which benefits policyholders and feeds back to the primary market in an expansion of demand.
Abstract |Local file in Dropbox|

This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of “impaired’’ policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Slane, Robert C.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

Smith, Brian B.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Sood, Neeraj

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Spurrier, Andrew

The Death of Death Futures - The Effects of the Health Insurance Portability and Accountability Act of 1996 on the Insurance and Viatical Settlement Industries

Spurrier, Andrew (1997) Connecticut Insurance Law Journal

The HIPAA has given the viatical settlement industry a measure of legitimacy it has historically lacked; the full effect of federal recognition on viatical settlement providers remains to be seen.
Abstract |Local file in Dropbox|

As the viatical settlement industry developed, insurance companies began to respond to the needs of dying insureds by providing accelerated death benefit provisions and riders as part of life insurance coverage. The insured is paid the present, or “discounted,” amount of the death benefit, the viatical settlement provider using the same method that an insurance company might use. In most situations, the viatical settlement provider, now the owner of the insurance policy, assumes the costs and benefits of maintaining the policy: paying premiums to prevent the policy from lapsing, collecting dividends, and receiving the insured’s death benefit when death occurs. A viator’s sale or assignment of an insurance policy to a qualified viatical settlement provider must be of a life insurance contract. E. Failure to tender the viatical settlement by the date disclosed to the viator renders the contract null and void. Further Federal regulation of the viatical settlement industry may ultimately arise due to the increased scrutiny of the industry by the Securities and Exchange Commission (“SEC”), especially in the wake of new viatical settlement provider investment strategies and outbreaks of broker malfeasance.

Stallard, Patrick John Eric

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Stone, Charles Austin

The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility

Stone, Charles Austin; Zissu, Anne (2012) Journal of Structured Finance

Compared to the deterministic model, the probabilistic and the stochastic valuation models diminish the need for a liquidity facility, because they project higher cash flows earlier on.
Abstract |Local file in Dropbox|

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

The Return on a Pool of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2007) Journal of Structured Finance

As required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.
Abstract |Local file in Dropbox|

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

The Supply and Demand for Life Settlement Contracts

Stone, Charles Austin (2009) Journal of Structured Finance

Life settlement market becomes efficient through an increase in the elasticity of both the supply and demand curves, positively related to the liquidity, transparency, and integrity of the market.
Abstract |Local file in Dropbox|

In this article the author discusses the implications the financial crisis and recession have had and will have on the market for senior life settlements. At first glance the financial crisis should actually spur the growth of the market in senior life settlements. This is because on the supply side of the market significant amounts of wealth of senior citizens have been lost in the stock, bond, and real estate markets. On the other hand, factors on the demand side of the market have reduced the offered prices for life insurance policies. Interestingly, the most dramatic event that impacted the life settlements market as the financial markets entered the crisis stage in the autumn of 2008, was the decision by the directors of 21st Services to revise their mortality tables. The author concludes that the element that creates a sustainable market in life settlements is the increased transparency of pricing on both sides of the market.

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

Swisher, Peter N.

Wagering on the Lives of Strangers: The Insurable Interest Requirement in the Life Insurance Secondary Market

Swisher, Peter N. (2015) Tort Trial & Insurance Practice Law Journal

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Abstract |Local file in Dropbox|

The purpose of this article is to explore and analyze the crucial inter- relationship and the present tension existing between various life settlement alternatives and the insurable interest requirement for life insurance. Does the 240-year-old insurable interest doctrine adequately meet the needs of a modern society in recognizing a secondary market for life in- surance? If so, what additional remedies, if any, are available to both the insured and the insurer to legally protect the contractual rights and reasonable expectations of the parties?

Thomas, Trevor

NCOIL Advances Life Settlement Disclosure Model

Thomas, Trevor (2010) National Underwriter

The Life Insurance and Financial Planning Commitee of the National Conference of Insurance Legislators (NCOIL) voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions.
Abstract |Local file in Dropbox|

A group of state lawmakers is proposing imposing a requirement on life insurers to tell policy owners that life settlements are an alternative to surrendering their policies. The Life Insurance and Financial Planning Committee of the National Conference of Insurance Legislators (NCOIL), Troy, NY, is drafting model state legislation to require life insurers to list life settlements as one of the options policy owners have when considering cashing in or lapsing their policies. In another development, NCOIL’s Life Insurance and Financial Planning Committee voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions (STAT).

Ulm, Eric R.

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Virkler, Tom

Life Settlements: A Second Look at a Secondary Market

Brecka, Gary; Virkler, Tom (2004) Journal of Financial Service Professionals

While unable to escape its history, the life settlement market has nonetheless avoided repeating mistakes of that history by emerging as an important and growing element of the financial planning world.
Abstract |Local file in Dropbox|

The unacceptable conditions and environment of the formative life settlement market have, understandably, left a bad impression in the minds of many within the life insurance planning industry. However, this dappled history of viatical sales should not predispose a planner to avoid a thorough examination and understanding of the current, rapidly expanding market for life insurance contracts. Today’s life settlement transactions bear little or no resemblance to the viatical sales of yore. Owners of an insurance contract can collect the proceeds payable under the contract upon the death of the insured, or they can sell the policy for its current market value. Institutional investors have come to realize that big blocks of properly underwritten policies acquired through life settlements can form a very predictable, very conservative, and very profitable source of income. Life insurance planners must not avoid involvement in or proper encouragement of life settlement options in the financial plans of their clientele.

Walsh, Robert

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

Warring, James D.

Turn Unneeded Policies into Cash

Warring, James D. (2005) Journal of Accountancy

A life Settlement can be a better alternative than surrendering a policy, especially with the possible repeal of the federal estate tax still on the horizon.
Abstract |Local file in Dropbox|

Life insurance planning isn’t always about making sure someone has enough coverage. It’s also about finding solutions for people who have too much. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option-a life settlement-to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured’s death. A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy’s face amount and cash surrender value as well as other factors, such as the insured’s health, age and the current policy premium.

Washington, Stephen L.

The “Concept” of a Model Act: The NAIC’s Amended Viatical Settlements Model Act

Washington, Stephen L. (2007) Journal of Structured Finance

Assuming that the legislative framework will see a dispersion of laws and regulations governing life settlements, life settlement market participants should anticipate increased compliance requirements and associated costs.
Abstract |Local file in Dropbox|

The National Association of Insurance Commissioners (the “NAIC”) voted on June 4, 2007 to approve certain proposed amendments to its 2001 Viatical Settlements Model Act (the “Model Act”). The amendments contain a number of useful updates to the prior NAIC model act adopted in 2001 that are aimed at protecting consumers, while others, if ultimately adopted by state legislatures, would appear to be squarely aimed at stifling the rapidly developing life settlement market. While the NAIC voted to approve the proposed amendments as a new model act, it is unlikely that many states will adopt the new Model Act in its adopted form, in view of certain overreaching provisions that are contained in the model. Ironically, the amended Model Act most likely will result in a much greater diversification of life settlement statutes among states that regulate life settlements, rather than the national uniform standard that the NAIC had perhaps hoped would result from its efforts. Adding to the mixed response to the Model Act, the National Conference of Insurance Legislators (“NCOIL”), a non-governmental organization comprised of state legislators involved in insurance legislation, has been reviewing and revising its own model act governing life settlements.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Weber, Richard M.

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Weinberg, Benjamin T.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Weinberg, Michael D.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Welch, Julie

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

Whitelaw, E. Randolph

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Winer, Teresa R.

How Life Settlements Fit Into The Impaired Risk Picture

Winer, Teresa R. (2003) National Underwriter

The advisor and client need to work together to evaluate the risks and opportunities.
Abstract |Local file in Dropbox|

Reports developments related to the financial services industry in the U.S. Definition of life settlement market; Inclusions of the viatical transactions; Issues on impaired risk.

Wood, Timothy O.

Life Settlements: Pricing Challenges and Opportunities

Schwartz, Jesse M.; Wood, Timothy O. (2008) Journal of Structured Finance

In the case of life-settlement assets, the availability of these margins may be squeezed as a result of the high demand for investments uncorrelated to the performance of the economy.
Abstract |Local file in Dropbox|

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters’ assessment relative to the investors’ risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

Xu, Jiahua

Predicting Longevity: An Analysis of Potential Alternatives to Life Expectancy Reports

Xu, Jiahua; Hoesch, Adrian (2018) Journal of Retirement

A predictive model combining advances in information and communication technology with innovation in medical science is able to overcome shortcomings of traditional LE reports, such as falsification and inaccuracy as well as low productivity.
Abstract |Local file in Dropbox|

Retirees, pension funds, and the insurance industry have all been negatively affected by the wrongful estimation of longevity. The inaccuracies in current life expectancy (LE) reports primarily result from misinterpretations of the influence of resilience factors on longevity. This study examines different and more accurate measurement metrics to minimize the risks related to biased LE calculations. By using both qualitative and quantitative research approaches, this research develops a new conceptual model: a two-factor-LE-analysis model with a telomere test as a medical basis (physiological factors) and a big data approach to filter the psychological factors to longevity. The authors suggest that the new model, together with the insights of the existing LE-projection methodologies, has considerable potential to improve LE predictions.

Zhu, Nan

Evaluating Life Expectancy Evaluations

Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan (2017) North American Actuarial Journal

Considering the average quality of the LEs and that past underwriting performance is a guide to future underwriting performance, implied difference in life expectancies (IDLE) can overcome deficiencies of the industry standard and provide a more accurate picture of the underwriter’s quality.
Abstract |Local file in Dropbox|

The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies. We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer, Daniel; Gao, Jin; Moenig, Thorsten; Ulm, Eric R.; Zhu, Nan (2017) North American Actuarial Journal

The value of the insurance contract, at least when considered in isolation, is often not sufficient to explain how policyholders lapse their policies and/or make use of exercise-dependent embedded options in advanced life insurance contracts.
Abstract |Local file in Dropbox|

The article presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The article should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

MacMinn, Richard D.; Zhu, Nan (2017) Journal of Risk and Insurance

Conventional longevity forwards exhibit relatively inferior performance in terms of hedging due to the nonnegligible basis risk between the general population and the settled subgroup, whereas biomedical research-backed obligations overcome this issue by providing returns that are strongly positively correlated with the specific longevity shock.
Abstract |Local file in Dropbox|

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument–the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

Coherent Pricing of Life Settlements under Asymmetric Information

Zhu, Nan; Bauer, Daniel (2013) Journal of Risk and Insurance

Policyholders’ adverse selection, resulting from asymmetric information, can explain the dicrepancy between expected and realized return.
Abstract |Local file in Dropbox|

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the “unique risks” within life settlements as recently discussed in the financial press.

Ziser, Boris

Life Settlements Today: A Secret No More

Ziser, Boris (2006) Journal of Structured Finance

As the industry matures, a dramatic increase in life settlement securitization transactions is expected.
Abstract |Local file in Dropbox|

The life settlement market continued to expand in 2005. The expansion has led to an increase in the recognition of this asset class and more traditional lenders have begun to enter the market. Life settlement transactions can be complicated and require structuring expertise to address various issues, including tax and securities law issues. The market is waiting for securitization to become an available vehicle through which industry participants will be able to access the capital markets. As the life settlement market continues to develop and issues such as longevity risk are addressed, we should see an increase in life settlement securitization transactions.

A Challenging Year in the Life Settlement Industry

Ziser, Boris (2009) Journal of Structured Finance

The life settlement market gradually recovers from the impact of the financial crisis and the extension of the life expectancies in the Fall of 2008.
Abstract |Local file in Dropbox|

The life settlement industry has not been immune to the effects of the financial crisis that has gripped the world in the last 12 months. Combined with shifting life expectancies and continuously developing legislation, the life settlement industry has had its share of challenges. New judicial decisions, however, have helped address certain issues relating to insurable interest, such as whether the intent of the insured is relevant in the analysis, which was a question raised in the widely publicized “Life Product Clearing” case. Furthermore, revenue rulings recently released by the IRS provided additional certainty with respect to the characterization of income in life settlement transactions. Although the economic environment continues to be challenging, as economies begin to recover and investors begin to invest their capital again, the uncorrelated nature of life settlements should continue to make them an attractive alternative asset class.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

Another Active Year in the Life Settlement Industry

Ziser, Boris (2008) Journal of Structured Finance

The life settlment market develops, despite uncertainties caused by judical activities, and lack of insurance product covering longevity risk which delays securitization.
Abstract |Local file in Dropbox|

In the past 12 months, there has been significant growth and regulatory and judicial activity in the life settlement industry. In addition to the 28 states that regulated life settlements a year ago, several additional states have either adopted life settlement laws or have proposed legislation that is pending. One common goal shared both by states that adopted new legislation and by those that revised existing legislation was the elimination of stranger-originated life insurance (STOLI). There are two categories of proposed and pending legislation: 1) legislation based on the Viatical Settlements Model Act, and 2) legislation based on the model legislation introduced by the National Conference of Insurance Legislators (NCOIL). On the structured finance front, the continued absence of a widely available and accepted insurance product covering the longevity risk inherent in life settlements, and the dislocation in the asset-backed market as a whole, have combined to further delay the eagerly awaited arrival of a pure, rated, life settlement securitization.

Life Settlements: An Option for Seniors, an Opportunity for Investors

Ziser, Boris (2005) Journal of Structured Finance

Life settlements offer an uncorrelated investment opportunity with attractive yields, as well as an alternative to seniors of which they were not previously aware.
Abstract |Local file in Dropbox|

Over the past two years, the secondary market for life insurance policies, known as life settlements, has grown in the United States to a multi-billion dollar a year industry. Life settlement transactions have increased in volume and are likely to remain attractive due to the yields, the uncorrelated nature of the asset, and the flexibility available in structuring transactions that can accommodate investor preferences. Life settlements often can provide an alternative to seniors of which they were not previously aware. As the universe of parties that can facilitate life settlement transactions expands, more seniors will be presented with the possibility of doing a life settlement and the volume of transactions will increase. As the life settlement market continues to grow, the number of third-party service providers, such as verification agents and medical underwriters, is also likely to increase. The result will be a more robust and efficient market that will enable the participants to continue to benefit from this unique asset.

The Life Settlement Industry Today

Ziser, Boris (2011) Journal of Structured Finance

The improved regulatory landscape, combined with prior owners unable to keep policies in force due to distress caused by credit crunch, has created new opportunities for portfolio purchasers.
Abstract |Local file in Dropbox|

Having survived the credit crisis, extensive regulatory changes, and the negative press, the life settlement industry is still standing. With investors having found a new appreciation for uncorrelated investments, life settlements are emerging as a sensible part of an institutional investor’s portfolio. The frenzied pace of regulatory changes we saw over the course of the last several years has abated, as most states have either adopted new life settlement laws or amended their existing laws. In 2010 the U.S. Securities and Exchange Commission organized a Life Settlement Task Force to examine the business and made a key recommendation to amend the definition of a “security” to include all life settlements. Judicial activity continued in 2010 on issues such as an insurance company’s claim that insurable interest was lacking at the time a policy was issued and allegations of fraud. Portfolio sales are among the most active segments of the life settlement market today.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

Zissu, Anne

The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility

Stone, Charles Austin; Zissu, Anne (2012) Journal of Structured Finance

Compared to the deterministic model, the probabilistic and the stochastic valuation models diminish the need for a liquidity facility, because they project higher cash flows earlier on.
Abstract |Local file in Dropbox|

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

The Return on a Pool of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2007) Journal of Structured Finance

As required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.
Abstract |Local file in Dropbox|

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

By tag

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efficiency

The Case for Sunshine in the Life Settlement Industry

Balinsky, Adam (2006) Journal of Structured Finance

Accessibility of policies, transparency, market-making mechanics and bid-ask processes as well as alternative purchase structures are yet to be addressed by the life settlement industry.
Abstract |Local file in Dropbox|

The secondary market for life insurance policies continues to grow as a result of the positive value created through improved liquidity for an otherwise illiquid asset. While there are critics of the life settlement industry, market forces and property rights ensure that the phenomenon of individuals reselling their life insurance policies will persist. As the life settlement market matures there are several changes that must occur in order to reduce transaction costs, allowing greater market efficiency and ensuring sustainability of the industry. This article makes the case for greater transparency and reduced transaction costs within the industry in order to increase returns to sellers, thereby motivating additional sellers to consider disposing of their policies and unlocking underlying value.

ethics

Virtues and Evils of Life Settlement

Breus, Alan (2008) Journal of Accountancy

Under the right conditions, sale of a life interest may be a good policy.
Abstract |Local file in Dropbox|

Life settlement, boosted by aggressive marketing, has developed into a major secondary market for existing life insurance policies. The rise of this now $15 billion annual market has brought with it fresh regulatory scrutiny to crack down on the parallel growth of stranger-originated life insurance (STOLI). Given the growing importance of this segment of the life insurance business, CPAs should understand how and when life settlement can be a good investment for clients as well as the possible tax implications and hazards.

A Life Settlement Mosaic

Katt, Peter C. (2008) Journal of Financial Planning

Most life settlement investments haven’t matured and profits are almost certainly an illusion.
Abstract |Local file in Dropbox|

The author’s life settlement views are formed from his experiences with clients. Since he is solicited by clients and not the other way around, he takes on what is brought to him. The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning. Almost all other possible life settlement situations should result in the policyowner retaining the policy – at least until the policy is near termination. The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. The appetite for doing life settlement transactions has become so great that the industry has convinced itself that life insurance is so mispriced that the policies of insureds in the same health are attractive targets as well.

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

The Transformation of Morals in Markets: Death, Benefits, and the Exchange of Life Insurance Policies

Quinn, Sarah (2008) American Journal of Sociology

The life insurance industry incubated specific technologies of commensuration, such as actuarial tables and contractual structures, as well as the notion that life insurance is not simply a rational phenomenon but also a moral one.
Abstract |Local file in Dropbox|

This article adopts an institutional approach to describe the changing secondary market for life insurance in the United States. Since the 1990s, this market, in which investors buy strangers’ life insurance policies, has grown in the face of considerable moral ambivalence. The author uses news reports and interviews to identify and describe three conceptions of this market: sacred revulsion, consumerist consolation, and rationalized reconciliation. Differences among the conceptions are considered in view of the institutional legacy of life insurance and its success in organizing practices, perceptions, and understandings about markets and death. From this case, the author draws implications for analyses of morals in markets, an important and emergent topic within economic sociology.

hedging

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

New Swaps to Hedge Alpha and Beta Longevity Risks of Life Settlement Pools

Mott, Antony R. (2007) Journal of Structured Finance

Whereas life settlements don’t always provide an obvious advantage to insurance companies, longevity derivatives do allow the insurance industry to identify, concentrate, and hedge the risks to insurers, perhaps more effectively than the insurers can do themselves.
Abstract |Local file in Dropbox|

The promise of high profits uncorrelated to the stock market draws prospective investors to life settlements. Spared perhaps from correlation risk, investors face other obvious and not-so-obvious risks including two types of longevity risk. The cost to hedge longevity risk has traditionally been exorbitant because those who take the other side are not themselves hedging. Newly engineered longevity swaps may provide lower cost hedging primarily because they are designed to place together two parties with opposite hedging needs.

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

legislation

Open Questions and Recent Guidance Regarding the Life Settlement Industry

Gelfond, Frederic J. (2009) Journal of Structured Finance

The life settlement industry lacks guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind.
Abstract |Local file in Dropbox|

Billions of dollars are being made available by investors from all over the world who are looking to participate in the life settlement industry. For investors who can develop reliable actuarial models and establish long-term business processes, this option presents a means of diversifying a portfolio with non-correlated assets. Despite the number of willing investors and the frequency with which these transactions are occurring, no “cookie cutter” transaction type, or business structure, is predominant in the industry. That is, there is a variety of participants in terms of form of entity, domestic and foreign locale, degrees of active participation in the operation of the “business,” sophistication and needs as to actuarial and business modeling, and expectations regarding buying and holding and securitizing the policies. Among the more significant drivers of this variation in structuring is a given investor’s identification and understanding of the numerous tax issues that are potentially involved. The problem, however, has been the apparent lack of guidance as to how to apply potentially applicable tax rules that were not drafted with this evolving industry in mind. In May 2009, the Internal Revenue Service released two revenue rulings (Revenue Ruling 2009-13 and Revenue Ruling 2009-14) that answer many of the questions that taxpayers have been asking in this area–or do they?

Long Live Life Settlements: The Current Status and Proposed Direction of the Life Settlement Market

Koutnik, Michael (2013) Marquette Law Review

Coupling a strict judicial adherence to incontestability clauses with state codification of a five-year holding period on newly issued policies would help stabilize the market by providing certainty to investors of validly settled policies while at the same time reducing the financial benefit offered by STOLI transactions.
Abstract |Local file in Dropbox|

The payment of life insurance policy benefits to the insured’s suriving spouse or child is something with which most people are both familiar and comfortable. However, when those benefits are instead paid to a third party investor who has no interest in the insured’s life, some people cry foul. Yet this is the basic premise of the secondary market for life insurance. In this market, insured individuals assign their policy benefits to an investor who agrees to pay the insured a lump sum of money in addition to assuming responsibility for the policy’s premiums. While the underlying concepts that support the secondary market for life insurance policies are not new, the young and imperfectly regulated market has been strained by an increase in supply and demand for these products. Because of the limited guidance within the market, fraud and uncertainty have pervaded many transactions. As a result, many validly settled policies may face challenges in the courts. In an effort to help stabilize and legitimize the secondary market, this Comment recommends coupling a strict judicial interpretation of the incontestability periods contained in many life insurance policies with a five year holding period on newly issued life insurance policies. This framework will help deter fraudulent transactions while promoting certainty among investors.

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Does Revenue Ruling 2009-13 Sound the Death Knell for Life Settlements?

Elder, Jack E. (2010) Journal of Financial Service Professionals

Revenue Ruling 2009-13 reduces the basis in a permanent life insurance contract by an amount equal to the cost of insurance protection, which, in policies with little or no cash value, is basically all the premiums.
Abstract |Local file in Dropbox|

There are a multitude of reasons why a family may no longer need an existing life insurance policy to meet their estate planning goals. In such cases, the policyowner might consider selling the policy for cash to an unrelated third party in the life insurance settlement market rather than allowing it to lapse. However, the IRS recently issued two revenue rulings that have dramatically impacted the life settlement market by increasing the income tax consequences to the sellers upon the sale of life insurance policies. This article provides a summary and an analysis of the examples set forth in Revenue Ruling 2009-13, which addresses the tax results as they relate to the policyowner/seller of a life insurance policy. Additionally, this article tackles the tax consequences of defaulting on a loan for a premium financed policy.

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Inside the Life Settlement Industry: An Institutional Investor’s Perspective

Seitel, Craig L. (2006) Journal of Structured Finance

Providers assess policies’ market value and assemble prime investment portfolios, while agents and brokers identify insureds wanting to sell their policies in the first place.
Abstract |Local file in Dropbox|

The life settlement industry offers a combination of challenges and opportunities for domestic and international investors in an uncorrelated asset class with promising returns. Although the life settlement supply chain is characterized by a variety of interdependent players including, financial planners, life settlement brokers, actuarial experts, verification agents, escrow agents and others, the provider’s role is the point at which the true economic value of the consumer’s life insurance policy is established through pricing and competitive bidding. New providers entering the marketplace can expect to face a variety of operational challenges from sourcing employees to sourcing product flow. This article explains the integral role of the provider through which institutional capital enters the marketplace, examines the challenges of attracting capital, and discusses the administrative issues involved in setting up shop.

Stranger Originated Life Insurance: Finding a Modern Cure for an Age-Old Problem

Fleisher, Maria (2010) Cumberland Law Review

Because of all of the risks involved, it is important that all states craft laws that will operate to eradicate harmful STOLI transac- tions, yet provide protection for seniors’ rights to participate in the legitimate life settlement market.
Abstract |Local file in Dropbox|

“There’s no reason to be the richest man in the cemetery. You can’t do any business from there.” - Colonel Sanders

Operational, Legal and Tax Issues in Life Settlement Transactions

Evans, Bruce D.; Russell, David T.; Sager, Thomas W. (2013) Journal of Insurance Regulation

By including a contractual provision that gives the life insurer the right of first refusal to match any viable life settlement offer, the life insurer would easily recapture most of the value lost to intermediaries in life settlement transactions.
Abstract |Local file in Dropbox|

The life settlement industry brokers the transfer of rights in life insurance policies from policyholders to investors. In this article, we examine life settlement transactions from the standpoint of the investor. We discuss the history and current state of life settlement structure, regulation and taxation. Although recent tax and legal rulings as well as industry challenges have reduced life settlement market activity, the benefits of these transactions persist for market participants. Over time, we expect life settlement activity – in one form or another – to reestablish growth as investors get resolution on regulatory questions and taxation and as the life settlement industry attempts to refurbish its tarnished reputation. This evolving situation may lead life insurers to develop new alternatives of their own.

The Death of Death Futures - The Effects of the Health Insurance Portability and Accountability Act of 1996 on the Insurance and Viatical Settlement Industries

Spurrier, Andrew (1997) Connecticut Insurance Law Journal

The HIPAA has given the viatical settlement industry a measure of legitimacy it has historically lacked; the full effect of federal recognition on viatical settlement providers remains to be seen.
Abstract |Local file in Dropbox|

As the viatical settlement industry developed, insurance companies began to respond to the needs of dying insureds by providing accelerated death benefit provisions and riders as part of life insurance coverage. The insured is paid the present, or “discounted,” amount of the death benefit, the viatical settlement provider using the same method that an insurance company might use. In most situations, the viatical settlement provider, now the owner of the insurance policy, assumes the costs and benefits of maintaining the policy: paying premiums to prevent the policy from lapsing, collecting dividends, and receiving the insured’s death benefit when death occurs. A viator’s sale or assignment of an insurance policy to a qualified viatical settlement provider must be of a life insurance contract. E. Failure to tender the viatical settlement by the date disclosed to the viator renders the contract null and void. Further Federal regulation of the viatical settlement industry may ultimately arise due to the increased scrutiny of the industry by the Securities and Exchange Commission (“SEC”), especially in the wake of new viatical settlement provider investment strategies and outbreaks of broker malfeasance.

Longevity Trading: Bridging the Gap Between the Insurance Markets and the Capital Markets

Dorr, David C. (2007) Journal of Structured Finance

Trading in life settlements and the future of the sector – a liquid life settlement market – requires standards to assist in the efficient transfer of risk and assets.
Abstract |Local file in Dropbox|

The recent ability to trade longevity risk through the use of life settlements, whether for speculation, investment, or as a hedge, has far reaching implications for the entire financial sector. Currently, there are two active markets that trade in life settlements: the secondary market and the tertiary market. The secondary life insurance market is where a life insurance policy first enters the marketplace. The tertiary market is where individual policies and portfolios of policies come back into the market and are among between financial institutions. By providing the industry with secure, business-to-business trading platforms specifically designed for life settlement transactions, online platforms address many of the inefficiencies and shortcomings currently facing this industry. Online exchanges lower the fixed costs associated with brokering, underwriting, and purchasing a life insurance policy and consequently provide the opportunity for smaller policies to be brokered in the secondary market. Electronic trading platforms provide the ideal solution to monitor, update, and report upon the requlatory requirements of both buyers and sellers. Transparency and disclosure is probably the most compelling justification for the use of electronic platforms. For securitization to develop and flourish, an electronic exchange will need to be in place to facilitate trades and transactions.

Vulture Capital Tax Manual-A Brief Guide to the Tax Issues Associated with Financial Investments in Life Settlements

Shapiro, David H. (2007) Journal of Taxation of Financial Products

A proper determination regarding the source (U.S. or foreign) of Sales Income and Death Benefit Income is a critical component of the U.S. tax analysis.
Abstract |Local file in Dropbox|

For several years, terminally ill individuals have been able to sell the entitlement to death benefits associated with their life insurance contracts to investors for cash. More recently, a market has developed that allows healthy individuals to sell their life insurance policies to investors for cash amounts exceed ing the policies cash surrender value. This practice has come to be known simply as the lifetime settlements of life insurance contracts. It would appear that life settlement investing is slowly emerging as a popular hedge fund strategy that is uncorrelated with other strategies and markets. State regulators have begun to focus their attention on these arrangements to help ensure that they are undertaken within certain parameters. Investors (and their tax advisors!) would similarly welcome clarity from the IRS with respect to the numerous tax issues involved. In the meantime, investors can only structure and manage their life settlement investments with careful attention paid to the uncertainty arising from the tax variables.

Life Settlements: Tax, Accounting, and Securities Law Issues

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Life settlement creates a new dimension – perhaps even a paradigm shift – to estate and financial planning for seniors that requires life insurance to be actively managed no different from fixed income, equity, and real estate asset classes.
Abstract |Local file in Dropbox|

The second of a two-part series examines the tax, accounting, and regulatory aspects of life settlements, as well as other issues professionals must consider with respect to life settlements. A significant milestone for the life settlement industry in 2005 was the clarification of acceptable accounting treatment for life settlement transactions by the Financial Accounting Standards Board. The investment method capitalizes the initial investment (purchase price) and continuing costs (policy premiums and direct external costs, if any). As a practical matter every life settlement application involving a variable policy requires special handling. Providers generally are interested in purchasing only the policy’s insurance or death benefit component, not the investment component. A few providers are experienced in separating the two components and will consider a variable policy. The client must truly understand the rights – and obligations – forfeited in exchange for a lump-sum purchase of the policy.

Life Settlements and the Planning Opportunities They Offer

Leimberg, Stephan R.; Gibbons, Albert E. (2003) Estate Planning

Life settlements make the most sense where it is likely that, in spite of significant health impairment, the insured may live beyond the point where continuing to pay premiums is economically feasible and the death benefit is exceeded by the overall (including time value of money) cost, a risk that the life settlement company can afford to take because of the pooling concept.
Abstract |Local file in Dropbox|

An interview with Martyn S. Babitz, an attorney and senior wealth planner with PNC Advisors’ Wealth Planning Group, regarding strategies using life settlements, is presented. The actual amount a policyowner will receive from a viatical or senior settlement will depend on numerous factors, including: 1. the type of policy being sold, 2. the face amount (death benefit) of the policy, and 3. the amount of future premium obligations (which will no longer be the insured’s obligation). The proceeds of an insurance policy held by the insured on his or her life are included in the gross estate of the policyowner if he or she dies owning the policy. To avoid estate tax on these insurance proceeds, the owner may want to give the policy to an irrevocable trust or outright to the intended beneficiary(ies). But, under Section 2035, if the owner dies within three years of such a transfer, the death proceeds will be included in his or her taxable estate. To avoid this problem, the policyowner could sell the policy and at some later date, gift the proceeds of the sale.

Accelerated Death Benefits, Viatical Settlements,and Viatical Loans: Options for the Terminally III

Schmidt, Paula (1997) Journal of Actuarial Practice

Because of issues regarding estate tax and estate/inheritance tax treatment of the death benefit remaining after acceleration. and other issues, some insurance companies have been waiting to initiate and introduce accelerated benefits.
Abstract |Local file in Dropbox|

There are three options available for terminally ill insureds who are interested in accessing all or part of the face value of their life insurance policies: through the life insurance company (accelerated death benefits), through a viatical company (a viatical settlement), or through a viatical loan company (a viatical loan). This paper explores the definitions and tax regulations, calculations, and the claims process associated with accelerated death benefits and via tical settlements and loans.

Life Settlements and Trust Accounts: A Possible Modification of the Trustee’s Responsibility?

Miller, Dean Edward (2002) Banking Law Journal

In case where a substantial portion of the assets of a trust is an unmatured life policy, a trustee subject to the Uniform Prudent Investor Act must consider whether it is oblidged, by its fiduciray duty, to seek a buyer for that policy.
Abstract |Local file in Dropbox|

According to the author, developing trust law may now impose new duties upon the trustees of trusts holding life insurance policies; one salient cause of this development of trust law is the emergence of the life settlement. This would seem to mean, at the least, that in numerous instances a bank or trust company serving as trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement.

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

6-Month Life Settlement Outlook: More Growth, More Regulation

Simon, Larry A. (2008) National Underwriter

A push for more uniform standards that effectively address STOLI and aim to stop fraud is expected, protecting both consumers and the professionals aiding seniors in financing planning goals.
Abstract |Local file in Dropbox|

The life settlement market will continue to expand and evolve in the second half of 2008. Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market. Since introduction of the National Conference of Insurance Legislators (NCOIL) and National Association of Insurance Commissioners (NAIC) model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry. This includes 5 bills based on the NAIC model and five based on the NCOIL model.

Coventry Wins Big Against Hancock

Hersch, Warren S. (2011) National Underwriter

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Abstract |Local file in Dropbox|

The article discusses the decision of officers of the State Insurance Department in the case of Coventry First LLC against John Hancock Life insurance Co. USA that could affect the life settlements involving conversions of term life insurance policies in New York.

The “Concept” of a Model Act: The NAIC’s Amended Viatical Settlements Model Act

Washington, Stephen L. (2007) Journal of Structured Finance

Assuming that the legislative framework will see a dispersion of laws and regulations governing life settlements, life settlement market participants should anticipate increased compliance requirements and associated costs.
Abstract |Local file in Dropbox|

The National Association of Insurance Commissioners (the “NAIC”) voted on June 4, 2007 to approve certain proposed amendments to its 2001 Viatical Settlements Model Act (the “Model Act”). The amendments contain a number of useful updates to the prior NAIC model act adopted in 2001 that are aimed at protecting consumers, while others, if ultimately adopted by state legislatures, would appear to be squarely aimed at stifling the rapidly developing life settlement market. While the NAIC voted to approve the proposed amendments as a new model act, it is unlikely that many states will adopt the new Model Act in its adopted form, in view of certain overreaching provisions that are contained in the model. Ironically, the amended Model Act most likely will result in a much greater diversification of life settlement statutes among states that regulate life settlements, rather than the national uniform standard that the NAIC had perhaps hoped would result from its efforts. Adding to the mixed response to the Model Act, the National Conference of Insurance Legislators (“NCOIL”), a non-governmental organization comprised of state legislators involved in insurance legislation, has been reviewing and revising its own model act governing life settlements.

Pricing Death: Analyzing the Secondary Market for Life Insurance Policies and its Regulatory Environment

Kohli, Sachin (2006) Buffalo Law Review

Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest.
Abstract |Local file in Dropbox|

Life insurance and the way we have typically thought about life insurance will continue to change over the coming years. The early development of a secondary market for life insurance policies and the benefit it has brought policyholders and investors illustrates the want and need for this market. Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest. Given the proper legislative attention, the secondary market can become a great source of value to the everyday life insurance consumer even more so than it is today.

Taxation of Life Settlements for Policyholders and Investors: An Updated Primer

Casey, Brian T.; Brunt, Kirk Van (2009) Journal of Structured Finance

With the issuance of Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in May 2009, the IRS has provided answers to many of the relevant questions, but also raised new questions, relavent to policy buyers and sellers.
Abstract |Local file in Dropbox|

The taxation of life insurance is a subject encompassing a wide range of lengthy and complicated tax rules. Life settlements add an additional layer of difficulty. This article provides a basic primer on the U.S. income taxation of life settlements from the perspective of both the original policyholder who sells a life insurance policy in a life settlement transaction and the investor who purchases a life insurance policy, either from its original policyholder or from another secondary life insurance market owner of the policy. Two recent revenue rulings issued by the Internal Revenue Service (IRS) both complicate and simplify this topic.

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

How Do the Privacy Laws and USA Patriot Act Apply to the Life Settlement Industry?

Casey, Brian T. (2007) Journal of Structured Finance

Several, but not necessarily all, privacy regulations apply to life settlement companies.
Abstract |Local file in Dropbox|

This article analyzes the application of the Gramm-Leach-Bliley Act, Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy laws, and the USA PATRIOT Act to the life settlement industry. The article further examines how the USA PATRIOT Act created anti-money laundering, suspicious activity reporting, and know-your-customer regulations that apply differently to various segments of the life settlement industry. In addition, the article examines the impact of modern financial and health privacy laws and how they impact insurance products that require disclosure of sensitive information from its customers.

Viatical Settlement and Accelerated Death Benefit Law: Helping Terminal, but Not Chronically Ill Patients

Eremia, Alexander D. (1997) DePaul Journal of Health Care Law

Because it is generally too difficult to determine the life expectancy of a chronically ill person, it is unlikely that VSPs will viaticate or insurance companies will accelerate the policies of such individuals.
Abstract |Local file in Dropbox|

Even those with health insurance often find their coverage insufficient to pay for all necessary medical expenses. In an effort to ease the financial burdens imposed on the terminally or chronically ill, the Health Insurance Portability and Accountability Act of 1996 (HPAA) was amended. As such, a chronically ill individual is one who has been certified by a licensed health care practitioner, within the preceding twelve month period, as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least ninety days due to a loss of functional capacity. An individual may also be deemed chronically ill if she is certified by a licensed health care practitioner within the preceding twelve month period as having a level of disability similar to the level of disability described above, or requiring substantial supervision to protect such an individual from threats to health and safety due to severe cognitive impairment. To reduce the burdens imposed on the government and the family of a chronically ill individual, tax incentives which encourage home health care could be provided to relatives or guardians of the chronically ill individual.

Common Securities Law Questions in the Life Settlements and Life Insurance Premium Finance Industries

Casey, Brian T.; Sherman, Thomas D. (2008) Journal of Structured Finance

Whether a life insurance-linked contract is a security or not depends on contract properties plus the definition on securities from federal and states’ laws.
Abstract |Local file in Dropbox|

This article examines three securities-related questions frequently encountered in the life settlements, or secondary life insurance, and the life insurance premium finance markets: 1) Life insurance policy put or call agreement: Is it a security? 2) A fund that owns life-settlement-acquired life insurance policies of life insurance premium finance loans: Is it an investment company? 3) Life insurance premium finance loan: Is it a security? The questions are analyzed only under the federal securities laws, but a similar analysis would obtain under most states’ securities laws where they apply.

Tax Aspects of Life Settlement Arrangements

Gardner, Randy; Welch, Julie; Covert, Neil (2009) Journal of Financial Planning

Clients with life insurance policies that no longer serve a purpose have many choices, including surrendering, selling, viaticating, borrowing from or exchanging the policy.
Abstract |Local file in Dropbox|

The article discusses tax regulations that investors need to consider when they decide to sell their life insurance policies for a lump sum payment. The amount of money that people can receive when they sell their life insurance policies is discussed. The varying amount of taxes that investors pay when they sell their life insurance policies are mentioned. Several different reasons why senior citizens sometimes sell their life insurance policies are discussed, including that they need money for their personal use, they cannot afford the life insurance policy or they need the money for medical care.

Life Settlements: The Death Wish Industry

Martin, Susan Lorde (2014) Syracuse Law Review

There is nothing to be gained by turning life insurance into a financial product that creates wealth for financiers who merely move money around, perverting the purpose of life insurance.
Abstract |Local file in Dropbox|

… So, the industry shifted to buying life insurance policies insuring the lives of people with other terminal illnesses; then, to buying policies of old people who were not terminally ill; then, to encouraging older people to buy insurance policies for the express purpose of selling them to investors; and finally, to bundling those policies together, securitizing them, and selling pieces of the bundles to investors. … On his application, Rucker said the policy was not going to be transferred to investors, and investors were not going to pay the policy premiums. … The court noted that incontestability clauses operate as statutes of limitations that keep insurance companies from continuing to collect premiums and reap profits until they have to pay out on policies, which they will refuse to do by claiming fraud or lack of insurable interest. … As in most of them, the new Arizona statute provides that insureds may not enter into life settlement contracts within two years of the issuance of policies, with exceptions similar to those in the New York statute. … Arizona’s statute suggests legislators there, like legislators in almost all other states with similar statutes, had a great deal of concern about promoters of life settlement agreements engaging in fraud and encouraging insureds and investors to enter into transactions that were not appropriate for them. … States became more amenable to various gambling enterprises because they were a source of revenue for the government. … Although life insurance companies oppose life settlements, they also provide the policies for those arrangements by encouraging consumers to purchase whole life policies (and their variants) instead of term insurance. … Other risks for investors in life settlement funds include: liquidity risk because cash outflows to pay premiums and fund redemptions occur regularly, whereas cash inflows from death benefits and new investments are unpredictable; policy availability risk; operational risks including litigation that can cost more than the death benefits; credit risk caused by the possible failure of the insurance carriers that underwrite the policies; and regulation risk because of changes in state and federal laws.

Betting on Death or Just Cashing In?: Taking a Look at the Life Settlement Industry Through the Lens of Kramer v. Phoenix Life Insurance

Brunau, Terence John (2012) Quinnipiac Probate Law Journal

The challenge is to create a set of laws that prevent investors from coercively betting on death at the expense of defenseless policy holders, but which also allow people to just cash in.
Abstract |Local file in Dropbox|

The article presents information on the Stranger Originated Life Insurance (STOLI) transactions with reference to the trial of Kramer v. Phoenix Life Insurance Co. It discusses the insurance law of New York based on selling of life insurance policies to strangers. It further focuses on the origin of STOLI and the decisions of the New York Court of Appeals. It also discusses the need of precise regulations for protecting legitimate life settlements.

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

Are Life Settlements a Security?

Casey, Brian T.; Sherman, Thomas D. (2007) Journal of Structured Finance

Life settlement, whether with fixed or variable underlying policies, may involve transaction of securities and hence be subject to security regulations; however, exemption can be achieved through proper structuring of the sale.
Abstract |Local file in Dropbox|

Given the extraordinary growth of the U.S. life settlement industry over the last decade, it is not surprising to find increased attention and scrutiny by academicians, the media and legal enforcement authorities–including, among others, state and federal securities regulatory and self-regulatory organizations. The securities laws regulators argue that investments in all forms of life settlement transactions involve the sale of securities, and that the full spectrum of securities laws applies. For the most part, they may be right. In discussing the pertinent securities-related issues surrounding life settlements, there are three fundamental questions to be addressed: 1) Does the sale of the life insurance policy to a passive investor that relies on others to conduct due diligence, price the policy, carry out the transaction, and perform follow-up services involve the sale of a”security" under the Securities Act of 1933, as amended (the “1933 Act”)? 2) Do the “registration” requirements under the 1933 Act apply? 3) Do sales activities in connection with the sale of the life insurance policy trigger any broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”)? This article concludes that the sale of the entire interest in an in-force life insurance policy to a passive investor may very well involve the sale of a security. The sale can be structured so that it is exempt from the registration requirements of state and federal laws. However, the state and federal anti-fraud provisions will apply to the transaction; and any person effecting the sale, particularly if compensated on the basis of the size of a successful sale, might be required to register with the SEC (and the applicable state) as a broker-dealer and be licensed as a security salesperson by the NASD.

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

STOLI on the Rocks: Why States Should Eliminate the Abusive Practice of Stranger-Owned Life Insurance

Mathews, Eryn (2007) Connecticut Insurance Law Journal

STOLI creates dangerous financial and legal risks for purchasers, investors and life insurance companies, and also raises serious ethical concerns.
Abstract |Local file in Dropbox|

The life insurance market is a burgeoning field of sophisticated investment transactions. A life insurance policy, traditionally an illiquid asset, has developed into an asset-backed security which has proved quite profitable to investors and insureds alike. These transactions allow insureds under certain circumstances to sell their policies to investors. The development of this secondary market has injected competition into the life insurance business and resulted in better products with more options for consumers.

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

Unresolved Tax Issues in Viatical and Life Settlements

Evans, Bruce D.; Fontenot, Tim; Scofield, Barbara; Shoemaker, Bill; Walsh, Robert (2009) Southern Business Review

Consistent with application of subrogation and assignment from the property and liability, none of the proceeds from life settlement policies are taxable.
Abstract |Local file in Dropbox|

Viatical and life settlements refer to the ownership transfer of a life insurance contract for valuable consideration. These settlements provide seller liquidity and investor return that has little correlation with other asset classes and investment markets. The first section of this article describes the life settlement market, its stakeholders, and individual investor perspectives. It then provides a general example of the life settlement contract and its functions. Next, the general tax treatment of life settlements for investors in these policies is investigated. Subsequently, the alternative tax treatment are considered. Finally, the comparative implications of the tax treatment are demonstrated. The current Internal Revenue Code embraces a tax treatment limiting funds to the insured seller and investors. This article presents arguments that such treatment of proceeds from life settlement policies to investors should be taxed as a capital gain in excess of basis.

CPAs and Life Settlements: Due Care, Competence, and Objectivity

Roth, Ronald M (2004) CPA Journal

A life settlement can remove the policy from the taxable estate, avoiding application of the three-year rule under IRC section 2035, in order to transfer additional assets tax-free to descendents.
Abstract |Local file in Dropbox|

In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products.

Another Active Year in the Life Settlement Industry

Ziser, Boris (2008) Journal of Structured Finance

The life settlment market develops, despite uncertainties caused by judical activities, and lack of insurance product covering longevity risk which delays securitization.
Abstract |Local file in Dropbox|

In the past 12 months, there has been significant growth and regulatory and judicial activity in the life settlement industry. In addition to the 28 states that regulated life settlements a year ago, several additional states have either adopted life settlement laws or have proposed legislation that is pending. One common goal shared both by states that adopted new legislation and by those that revised existing legislation was the elimination of stranger-originated life insurance (STOLI). There are two categories of proposed and pending legislation: 1) legislation based on the Viatical Settlements Model Act, and 2) legislation based on the model legislation introduced by the National Conference of Insurance Legislators (NCOIL). On the structured finance front, the continued absence of a widely available and accepted insurance product covering the longevity risk inherent in life settlements, and the dislocation in the asset-backed market as a whole, have combined to further delay the eagerly awaited arrival of a pure, rated, life settlement securitization.

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

NCOIL Advances Life Settlement Disclosure Model

Thomas, Trevor (2010) National Underwriter

The Life Insurance and Financial Planning Commitee of the National Conference of Insurance Legislators (NCOIL) voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions.
Abstract |Local file in Dropbox|

A group of state lawmakers is proposing imposing a requirement on life insurers to tell policy owners that life settlements are an alternative to surrendering their policies. The Life Insurance and Financial Planning Committee of the National Conference of Insurance Legislators (NCOIL), Troy, NY, is drafting model state legislation to require life insurers to list life settlements as one of the options policy owners have when considering cashing in or lapsing their policies. In another development, NCOIL’s Life Insurance and Financial Planning Committee voted to look into possible model legislation to regulate sales of stranger-initiated annuity transactions (STAT).

It’s Time To Ban IOLI

Piontek, Steve (2005) National Underwriter

Investor-owned life insurance, which moves far from the noble basis of protecting loved ones, inevitably cheapens the concept and should be banned.
Abstract |Local file in Dropbox|

It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners (NAIC) took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution. What is pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment. IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.

An Update on the Life Settlement Industry: Recent Challenges and Tasks Ahead

Seitel, Craig L. (2010) Journal of Structured Finance

Regulation in the form of FINRA and the SEC helps validate the life settlement industry, now lacking liquidity, and should create a greater comfort level for potential investors.
Abstract |Local file in Dropbox|

Now more than 10 years into its life cycle, the life settlement industry is facing challenges whose outcomes will determine its very existence. This industry experienced robust and even exponential growth during the first decade of the new millennium. Its vitality and prospects for future growth are in question today. That said, the underlying fundamentals of this industry from an investor’s perspective remain economically sound and compelling. This article reviews the current state of the life settlement industry and explores the ongoing economic impact resulting from the financial crisis, regulatory developments, and industry dynamics. It also explores various future scenarios and potential outcomes as the industry continues to evolve.

An Introduction to the Use of Viatical and Life Settlements

Rios, Damien (2004) Estate Planning

Before entering into a viatical settlement contract, policyowner and the policyowner’s advisors should consider all options available to the policyowner, fully understand the process involved in a viatical settlement, and know what rights the policyowner has under applicable law and the governing documents.
Abstract |Local file in Dropbox|

The viatical settlement market provides a valuable alternative to policyowners who no longer wish to keep their life insurance policies, but are not satisfied with the financial return that may be available if the policyowner surrenders the policy to the insurance company. The policyowner or the policyowner’s advisors should determine whether the viatical settlement is a regulated transaction under applicable state law and whether the purchaser must be licensed to purchase the policy. If a license is required, the policy-owner or advisor should verify that the purchaser has the appropriate license by either requesting a copy of the license from the purchaser or contacting the division of insurance in the appropriate state. Lastly, the policyowner should consult his or her advisors concerning the tax consequences of the viatical settlement, the effect that the receipt of the viatical settlement proceeds may have on the policy-owner’s eligibility for government assistance, and any effect the viatical settlement may have on the policyowner’s rights against creditor’s claims.

Life Settlement Transactions: Important Tax and Legal Issues to Consider

Magner, James C.; Leimberg, Stephan R. (2007) Estate Planning

Although the number of life settlement transactions has increased trmendously in recent years, there are still many significant and unresolved tax and legal issues that advisors and fiduciaries must consider.
Abstract |Local file in Dropbox|

Although the sale of a life insurance policy to a life settlement company would seem to be a relatively straightforward transaction, advisors and policy owners may be surprised at the number of documents buyers typically include in their closing package. Advisors will generally find that life settlement companies are unwilling to make substantive modifications to their documents, and there may be valid business reasons for this position. Even if changes are not accepted, there are a number of important issues the advisor should consider in the document review process. Advisors should complete a thorough credit check on the provider and funder, and ask whether the policy is being bought to be sold or to be held. Advisors, particularly those who sign the policy owner’s tax return, should not overlook the fact that life insurance contracts are unique assets subject to special tax rules. Also, loan interest should be carefully reviewed.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly

Perez, Jessica Maria (2002) Elder Law Journal

Despite criticism associated with the viatical industry of the 1990s, the senior settlement industry of the new millennium is a modern and improved system, providing the elderly with a viable financial alternative for long-term care.
Abstract |Local file in Dropbox|

As seniors struggle to keep pace with medical care costs and other expenses, many must look to alternative sources of financial freedom. Senior settlement agreements, through which a senior may sell her life insurance policy to a third party for a percentage of its future value, may provide one such alternative. In this Note, Jessica Maria Perez explores the history of senior settlement agreements from their birth as sisters to similar agreements made by the chronically ill, to the present in which they are increasingly entered into by healthy seniors. Perez analyzes the positive and negative aspects of these agreements from basic economic risk to ethical issues to tax implications. She analyzes recent regulatory developments in this area, including the Viatical Settlements Model Act and various state statutes. Perez recommends increased regulation at the state level, encouraging states to adopt the Model Act. She also recommends that these transactions be made tax-exempt and that attorneys play a greater role in the making of senior settlements. With these reforms, Perez suggests that the senior settlement agreement can be a safe and effective method by which seniors can realize financial freedom.

Regulating All Life Settlements as Securities: The New Age of the Life Settlement Investment Market

Casey, Brian T.; Lowe, J.D. Jeffrey D. (2011) Journal of Structured Finance

Although the Life Settlements Task Force recommendations have merit and have gained momentum with the SEC and some members of Congress, it is unlikely to see a modification to the definition of “security” to include life settlements in the very near future.
Abstract |Local file in Dropbox|

The life settlement investment market (“LSIM”) has been characterized as a “wild west” type investment environment over the course of the last decade. With very little federal oversight, the market flourished during the late ’90s during the viatical settlement era and well into the 2000s in the form of the life settlement market. The financial meltdown that gripped the United States in late 2007 and continues today has garnered a call to action for the federal government to enact legislation to protect investors from abuses apparent in the investment community. It appears now that the legislative call to action may formally make its way into the LSIM. The Life Settlements Task Force (“LSTF”), created by the Securities and Exchange Commission (“SEC”) in August 2009, was established to investigate and examine issues in the LSIM and to advise the SEC whether market practices in and regulatory oversight of the LSIM could be improved. This article outlines the basic findings of the LSTF as well as detailing the potential repercussions of the federal government acting upon those recommendations.

Taxation of Life Settlements–Unanswered Questions After Rev. Ruls. 2009-13 and 2009-14

Keligian, David L.; Larsen, Robert W. (2009) Journal of Taxation

While recognizing that Section 72(e) does not address the character of income recognized, the IRS has concluded that such income always must be taxed as ordinary income, even if the policy owner had solely an investment intent with respect to the policy.
Abstract |Local file in Dropbox|

For the most part, the Service’s answer to the question, “what is the tax treatment of the proceeds of a life settlement transaction?,” will be “ordinary income.” Given the lack of useful precedent, the IRS seems to have chosen the result that provides the most amount of revenue, despite the fact that at least some purchasers of such life insurance would appear to have an investment motive entitling them to capital gains treatment.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

longevity

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

New Swaps to Hedge Alpha and Beta Longevity Risks of Life Settlement Pools

Mott, Antony R. (2007) Journal of Structured Finance

Whereas life settlements don’t always provide an obvious advantage to insurance companies, longevity derivatives do allow the insurance industry to identify, concentrate, and hedge the risks to insurers, perhaps more effectively than the insurers can do themselves.
Abstract |Local file in Dropbox|

The promise of high profits uncorrelated to the stock market draws prospective investors to life settlements. Spared perhaps from correlation risk, investors face other obvious and not-so-obvious risks including two types of longevity risk. The cost to hedge longevity risk has traditionally been exorbitant because those who take the other side are not themselves hedging. Newly engineered longevity swaps may provide lower cost hedging primarily because they are designed to place together two parties with opposite hedging needs.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Has Longevity in the U.S. Peaked?

Dorr, David C. (2009) Journal of Structured Finance

Population increase, more expensive healthcare, decource depletion, lower quality food and declining wealth for seniors pull down longevity growth.
Abstract |Local file in Dropbox|

This article enumerates the five factors that influence longevity, with its attendant impact on the life settlement industry. We are at the apex of the longevity growth curve. It may increase slightly over the next 10 years, and then it will drop quite dramatically in the following years. As longevity declines, to the extent professional longevity estimates used by the life settlement industry are reduced at a slower rate than the actual changes in longevity, investors in life settlements may see opportunities to arbitrage those longevity estimates and increase their yields.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Hedging Longevity Risk in Life Settlements Using Biomedical Research-Backed Obligations

MacMinn, Richard D.; Zhu, Nan (2017) Journal of Risk and Insurance

Conventional longevity forwards exhibit relatively inferior performance in terms of hedging due to the nonnegligible basis risk between the general population and the settled subgroup, whereas biomedical research-backed obligations overcome this issue by providing returns that are strongly positively correlated with the specific longevity shock.
Abstract |Local file in Dropbox|

In the life settlement market, mortality risk is transferred from life insurance policyholders to third-party life settlement firms. This risk transfer occurs in conjunction with an information transfer that is relevant not only for pricing, but also for risk management. In this analysis, we compare the efficiency of two different hedging instruments in managing the mortality risk of the life settlement firm. First, we claim and then demonstrate that conventional longevity-linked securities do not perform as effectively in the secondary life market, that is, life settlement market, as in the annuity and pension markets due to the basis risk that exists between the general population and the life settlement subgroup. Second, we show that the unique risk exposure of the life settlement firm can be specifically targeted using a new instrument–the biomedical research-backed obligations. Our finding connects two seemingly independent markets and can promote the healthy development of both.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Lessons from the World of Micro Longevity

Sheridan, Matthew (2014) Pension and Longevity Risk Transfer for Institutional Investors

Life settlements provide useful, real-world lessons – such as awareness of informational asymmetries and the use of big data techniques – in managing longevity risk, many of which are applicable to the developing macro-longevity markets.
Abstract |Local file in Dropbox|

The pension risk transfer market has a bottleneck in its inability to attract sufficient institutional investor interest as longevity risk takers. Having spent many years at a large institution as part of a team investing directly in longevity risk via the life settlements market, the author encountered many of the challenges of managing this nascent risk type. The pension risk transfer market often seems at pains to distance itself from its life settlements cousin; however, in many ways “longevity is longevity” and the experience of dealing with the challenges in life settlements can offer valuable insights to investors across the full spectrum of the risk class. The article is aimed at capital markets investors considering longevity as an investable asset. It offers a discussion of the current perception of longevity risk, as well as a list of hints and warnings derived from direct market experience.

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

The Impact of Life Expectancies on the Life Settlement Industry

Parankirinathan, Kiri; Reed, Barry; Bakos, Tom (2012) Journal of Structured Finance

Underlying base mortality rates used to calculate life expectancies affect policy valuation.
Abstract |Local file in Dropbox|

This article describes the impact of life expectancy in the life settlement market with respect to the rate of return to investors and the values of policies. The life settlement industry overlooks, in valuation as well as selection criteria, many factors that are critical in purchasing life settlement policies.The article provides an overview to help the reader understand the risks associated with life settlement purchases as well as additional tools that may be utilized in valuing the policies/portfolios. The article points out the need for reasonable actuarial assumptions as well as the need for medical underwriting to properly consider the health and lifestyles of the affluent seniors whose life policies currently are the most frequent components of life settlements. In addition, the article explains the need for an industry standard with respect to underlying actuarial assumptions and medical underwriting guidelines.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

market history

The Birth of the Life Market

Blake, David; Cairns, Andrew J. G.; Dowd, Kevin (2008) Asia-Pacific Journal of Risk and Insurance

The existence of longevity-linked instruments will facilitate the development of annuities markets in the developing world and could well save annuities markets in the developed world from extinction.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments and individuals is beginning to be recognized and quantified. The traditional insurance route for managing this risk is capacity constrained, leaving the capital markets to provide an effective solution. We consider what capital markets need to both start and evolve. We then look at the first generation of bond-based capital market solutions that have been tried so far and examine their success or failure. The lessons learned here have informed the design of the second generation of derivatives-based capital market solutions. Although there remain barriers to surmount, we are witnessing the birth of the life market, the market in longevityrelated financial instruments.

Pricing Death: Analyzing the Secondary Market for Life Insurance Policies and its Regulatory Environment

Kohli, Sachin (2006) Buffalo Law Review

Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest.
Abstract |Local file in Dropbox|

Life insurance and the way we have typically thought about life insurance will continue to change over the coming years. The early development of a secondary market for life insurance policies and the benefit it has brought policyholders and investors illustrates the want and need for this market. Current legislation has provided a good beginning framework for protecting policyholders in a life settlement transaction; however, more is needed in regards to pricing regulations, disclosure requirements, and conflicts of interest. Given the proper legislative attention, the secondary market can become a great source of value to the everyday life insurance consumer even more so than it is today.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

The Life Settlement Industry Tests State Insurable Interest Rules

Kozol, George B. (2009) Journal of Financial Service Professionals

While this litigation may temporarily destabilize the life settlement business, the increase in supply of policies associated with the aging of the baby boomer generation and the increase in demand for uncorrelated assets will fuel stability and growth in the settlement business.
Abstract |Local file in Dropbox|

As world financial markets become more interdependent, the demand for uncorrelated investments continues to increase. Institutional investors and sophisticated individual investors are searching for investment returns that are not linked to bonds, equities, or commodities. In the late 1990s investment bankers and hedge fund investment managers turned to the secondary market for life insurance to create such an investment class-life settlement-backed securities. The demand for the new securities had been so great, prior to the financial crisis that began last fall, that syndicators and promoters required amounts of life insurance on older-age individuals that exceeded the supply available through normal functioning of the secondary market. The unprecedented demand for life policies on older-aged individuals produced life insurance applications and arrangements that tested the boundaries of state insurable interest laws. This article will explain the tension between life settlement-backed securities and state insurable interest laws. The article also will overview regulatory developments that should assuage this tension.

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

You Can Bet Your Life on It! Regulating Senior Settlements to Be a Financial Alternative for the Elderly

Perez, Jessica Maria (2002) Elder Law Journal

Despite criticism associated with the viatical industry of the 1990s, the senior settlement industry of the new millennium is a modern and improved system, providing the elderly with a viable financial alternative for long-term care.
Abstract |Local file in Dropbox|

As seniors struggle to keep pace with medical care costs and other expenses, many must look to alternative sources of financial freedom. Senior settlement agreements, through which a senior may sell her life insurance policy to a third party for a percentage of its future value, may provide one such alternative. In this Note, Jessica Maria Perez explores the history of senior settlement agreements from their birth as sisters to similar agreements made by the chronically ill, to the present in which they are increasingly entered into by healthy seniors. Perez analyzes the positive and negative aspects of these agreements from basic economic risk to ethical issues to tax implications. She analyzes recent regulatory developments in this area, including the Viatical Settlements Model Act and various state statutes. Perez recommends increased regulation at the state level, encouraging states to adopt the Model Act. She also recommends that these transactions be made tax-exempt and that attorneys play a greater role in the making of senior settlements. With these reforms, Perez suggests that the senior settlement agreement can be a safe and effective method by which seniors can realize financial freedom.

The Transformation of Morals in Markets: Death, Benefits, and the Exchange of Life Insurance Policies

Quinn, Sarah (2008) American Journal of Sociology

The life insurance industry incubated specific technologies of commensuration, such as actuarial tables and contractual structures, as well as the notion that life insurance is not simply a rational phenomenon but also a moral one.
Abstract |Local file in Dropbox|

This article adopts an institutional approach to describe the changing secondary market for life insurance in the United States. Since the 1990s, this market, in which investors buy strangers’ life insurance policies, has grown in the face of considerable moral ambivalence. The author uses news reports and interviews to identify and describe three conceptions of this market: sacred revulsion, consumerist consolation, and rationalized reconciliation. Differences among the conceptions are considered in view of the institutional legacy of life insurance and its success in organizing practices, perceptions, and understandings about markets and death. From this case, the author draws implications for analyses of morals in markets, an important and emergent topic within economic sociology.

market overview

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Life Settlements Today: A Secret No More

Ziser, Boris (2006) Journal of Structured Finance

As the industry matures, a dramatic increase in life settlement securitization transactions is expected.
Abstract |Local file in Dropbox|

The life settlement market continued to expand in 2005. The expansion has led to an increase in the recognition of this asset class and more traditional lenders have begun to enter the market. Life settlement transactions can be complicated and require structuring expertise to address various issues, including tax and securities law issues. The market is waiting for securitization to become an available vehicle through which industry participants will be able to access the capital markets. As the life settlement market continues to develop and issues such as longevity risk are addressed, we should see an increase in life settlement securitization transactions.

A Provider’s Reflection from Inside the Life Settlement Industry: Understanding the Chaotic Environment

Seitel, Craig L. (2009) Journal of Structured Finance

While many investors were hurt by life expectancy adjustments, new investors stand to benefit from the more conservative analysis.
Abstract |Local file in Dropbox|

Now nine years into its life cycle, the life settlement industry is no longer a fledgling, early-stage sector of the financial community. Regulated by 30 state insurance departments (including Puerto Rico) and, in part, the Financial Industry Regulatory Authority (FINRA), this industry has validated itself by creating a secondary market for life insurance policies to the benefit of consumers as well as an asset class for investors that is uncorrelated with the credit and investment risk of the typical money manager’s portfolio. That said, the second half of 2008 through 2009 thus far has proven to be the most challenging of times this industry has experienced. For reasons brought about by the global economy as well as reasons indigenous to this industry, the life settlement community finds itself in a state of chaos. This article reviews the reasons behind such turmoil and examines the confluence of external and internal forces resulting in this financial perfect storm. It also explores the potential remedies and other factors that provide hope that this industry will not only survive, but prevail, in the long run.

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Gatzert, Nadine (2010) Risk Management and Insurance Review

In the U.S., where policies of individuals above age 65 with reduced life expectancy are traded, while in the U.K. and Germany, with-profits and participating endowment policies with a fixed term are traded.
Abstract |Local file in Dropbox|

In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S.market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market’s unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.

Analyzing an Emerging Industry: Viatical Transactions and the Secondary Market for Life Insurance Policies

Giacalone, Joseph A. (2001) Southern Business Review

Accelerated death benefits and the increased regulatory oversight challenges the life settlement industry.
Abstract |Local file in Dropbox|

Traditionally, life insurance has been primarily viewed as a legacy paid to designated beneficiaries after the death of the insured. Increasingly, financial planners, estate planners, and other financial advisors are advising clients to consider their life insurance policies as an underutilized asset that can provide significant financial resources to them while they are still alive.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

Implicit Options in Life Insurance: An Overview

Gatzert, Nadine (2009) Zeitschrift f{"{u}}r die gesamte Versicherungswissenschaft

A trend toward risk management systems based on the fair value concept offers
Abstract |Local file in Dropbox|

Proper pricing and risk assessment of implicit options in life insurance contracts has gained substantial attention in recent years, which is reflected in a growing literature in this field. In this article, we first present the different contract designs in Europe and the United States and point out differences in the contract design. Second, a comprehensive overview and description of implicit options contained in these contracts is provided. With focus on participating contracts, we present contract design, valuation methods, and main results of several recent articles in this field. The study indicates that current developments regarding regulation (Solvency II, Swiss Solvency Test), accounting (IFRS), customer needs, and secondary life insurance markets may lead to a trend away from traditional contract design of participating policies and toward new products that are of a more transparent modular form such as variable annuities. These new contracts will contain fewer basic guarantees and a set of additional, adequately priced options.

The Supply and Demand for Life Settlement Contracts

Stone, Charles Austin (2009) Journal of Structured Finance

Life settlement market becomes efficient through an increase in the elasticity of both the supply and demand curves, positively related to the liquidity, transparency, and integrity of the market.
Abstract |Local file in Dropbox|

In this article the author discusses the implications the financial crisis and recession have had and will have on the market for senior life settlements. At first glance the financial crisis should actually spur the growth of the market in senior life settlements. This is because on the supply side of the market significant amounts of wealth of senior citizens have been lost in the stock, bond, and real estate markets. On the other hand, factors on the demand side of the market have reduced the offered prices for life insurance policies. Interestingly, the most dramatic event that impacted the life settlements market as the financial markets entered the crisis stage in the autumn of 2008, was the decision by the directors of 21st Services to revise their mortality tables. The author concludes that the element that creates a sustainable market in life settlements is the increased transparency of pricing on both sides of the market.

Life Settlements: An Option for Seniors, an Opportunity for Investors

Ziser, Boris (2005) Journal of Structured Finance

Life settlements offer an uncorrelated investment opportunity with attractive yields, as well as an alternative to seniors of which they were not previously aware.
Abstract |Local file in Dropbox|

Over the past two years, the secondary market for life insurance policies, known as life settlements, has grown in the United States to a multi-billion dollar a year industry. Life settlement transactions have increased in volume and are likely to remain attractive due to the yields, the uncorrelated nature of the asset, and the flexibility available in structuring transactions that can accommodate investor preferences. Life settlements often can provide an alternative to seniors of which they were not previously aware. As the universe of parties that can facilitate life settlement transactions expands, more seniors will be presented with the possibility of doing a life settlement and the volume of transactions will increase. As the life settlement market continues to grow, the number of third-party service providers, such as verification agents and medical underwriters, is also likely to increase. The result will be a more robust and efficient market that will enable the participants to continue to benefit from this unique asset.

An Update on the Life Settlement Industry: Recent Challenges and Tasks Ahead

Seitel, Craig L. (2010) Journal of Structured Finance

Regulation in the form of FINRA and the SEC helps validate the life settlement industry, now lacking liquidity, and should create a greater comfort level for potential investors.
Abstract |Local file in Dropbox|

Now more than 10 years into its life cycle, the life settlement industry is facing challenges whose outcomes will determine its very existence. This industry experienced robust and even exponential growth during the first decade of the new millennium. Its vitality and prospects for future growth are in question today. That said, the underlying fundamentals of this industry from an investor’s perspective remain economically sound and compelling. This article reviews the current state of the life settlement industry and explores the ongoing economic impact resulting from the financial crisis, regulatory developments, and industry dynamics. It also explores various future scenarios and potential outcomes as the industry continues to evolve.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

The New Life Market

Blake, David; Cairns, Andrew J. G.; Coughlan, Guy; Dowd, Kevin; MacMinn, Richard D. (2013) Journal of Risk and Insurance

The Life Market faces challenges from regulatory responses to the Global Financial Crisis, and doubts from long-term investors, such as endowments, sovereign wealth funds, and family offices, who must ultimately be persuaded to hold longevity-linked assets if the market is to be a success.
Abstract |Local file in Dropbox|

The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life-related risk exposure in financial terms and poses a potential threat to the whole system of retirement income provision. This article reviews the birth and development of the Life Market, the new market related to the transfer of longevity and mortality risks. We note that the emergence of a traded market in longevity-linked capital market instruments could act as a catalyst to help facilitate the development of annuity markets both in the developed and the developing world and protect the long-term viability of retirement income provision globally.

The Life Settlement Industry Today

Ziser, Boris (2011) Journal of Structured Finance

The improved regulatory landscape, combined with prior owners unable to keep policies in force due to distress caused by credit crunch, has created new opportunities for portfolio purchasers.
Abstract |Local file in Dropbox|

Having survived the credit crisis, extensive regulatory changes, and the negative press, the life settlement industry is still standing. With investors having found a new appreciation for uncorrelated investments, life settlements are emerging as a sensible part of an institutional investor’s portfolio. The frenzied pace of regulatory changes we saw over the course of the last several years has abated, as most states have either adopted new life settlement laws or amended their existing laws. In 2010 the U.S. Securities and Exchange Commission organized a Life Settlement Task Force to examine the business and made a key recommendation to amend the definition of a “security” to include all life settlements. Judicial activity continued in 2010 on issues such as an insurance company’s claim that insurable interest was lacking at the time a policy was issued and allegations of fraud. Portfolio sales are among the most active segments of the life settlement market today.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

mortality

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

Market Evidence of Misperceived Mortality Risk

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) Journal of Economic Behavior & Organization

Among sicker HIV patients, home ownership is positively correlated to the propensity to sell back insurance; among healthier HIV patients, the correlation is negative.
Abstract |Local file in Dropbox|

We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

operation

Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments

Seitel, Craig L. (2008) Journal of Structured Finance

The life settlement industry is maturing and settling into a more efficient and effective marketplace, as states continue to develop regulation with the hopes of supporting best business practices and protecting the consumer.
Abstract |Local file in Dropbox|

New and evolving challenges confront all participants in the life settlement industry as this marketplace continues to experience explosive growth. As in any emerging industry, along with growth comes regulation, conforming business practices, and an evolution of the product itself. The life settlement industry is no exception. This past year has seen the departure of many of the original investors, and new investors entering the marketplace. There have been new regulatory developments, some that will be helpful to the long-term growth of the industry, and some that may have a negative impact. On the structural front there has been a shifting of roles and the development of new products. This article reviews these trends and developments and probes new areas in this increasingly dynamic marketplace.

Inside the Life Settlement Industry: An Institutional Investor’s Perspective

Seitel, Craig L. (2006) Journal of Structured Finance

Providers assess policies’ market value and assemble prime investment portfolios, while agents and brokers identify insureds wanting to sell their policies in the first place.
Abstract |Local file in Dropbox|

The life settlement industry offers a combination of challenges and opportunities for domestic and international investors in an uncorrelated asset class with promising returns. Although the life settlement supply chain is characterized by a variety of interdependent players including, financial planners, life settlement brokers, actuarial experts, verification agents, escrow agents and others, the provider’s role is the point at which the true economic value of the consumer’s life insurance policy is established through pricing and competitive bidding. New providers entering the marketplace can expect to face a variety of operational challenges from sourcing employees to sourcing product flow. This article explains the integral role of the provider through which institutional capital enters the marketplace, examines the challenges of attracting capital, and discusses the administrative issues involved in setting up shop.

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

Turn Unneeded Policies into Cash

Warring, James D. (2005) Journal of Accountancy

A life Settlement can be a better alternative than surrendering a policy, especially with the possible repeal of the federal estate tax still on the horizon.
Abstract |Local file in Dropbox|

Life insurance planning isn’t always about making sure someone has enough coverage. It’s also about finding solutions for people who have too much. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option-a life settlement-to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured’s death. A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy’s face amount and cash surrender value as well as other factors, such as the insured’s health, age and the current policy premium.

A Complex Game: The Life Settlement Process

Katt, Peter C. (2011) Journal of Financial Planning

Even if a policy seller knows who will initially own the policy, it is almost certain that policies will change hands several times before the insured passes.
Abstract |Local file in Dropbox|

This article provides details of a life settlement case the author dealt with last year. The author has worked with Mark for 10 years managing three $2 million UL policies insuring him that are owned by an irrevocable trust. Mark, now 80, has been in poor health since the author’s work began with him. The insurance company involved, AB Life, has only fair financial strength ratings that have been declining. Mark’s life insurance is viewed as other investments he has, thus the logic of wishing to pursue selling some of his policies to diversify his perceived risk with AB Life. Mark noticed an ad from a local agent promising results, so he called the agent. The agent hooked up with a settlement broker and they were very lucky that during this period a buyer for AB Life did emerge. This wasn’t lucky for Mark because this meant large commissions would be subtracted from the purchase price.

Lurking Pitfalls: Due Diligence in Life Settlements Transactions

Freeman, M. Bryan (2007) Journal of Structured Finance

Most industry players acknowledge the obvious pitfalls of difficult-to-estimate life expectancies, yet some fail to perform institutional-quality underwriting (due diligence) on any number of obvious risk areas.
Abstract |Local file in Dropbox|

In the relatively young history of the secondary market for life insurance, a great deal of attention has focused on the due diligence necessary to adequately gauge life expectancies. Still, many investors overlook various other life settlement transaction risks that have potentially significant consequences, including assuring that policies owned by trusts are saleable and otherwise what they seem to be, adequately following the patchwork of vastly differing state laws and regulations, potential misuse of the accredited investor exemptions of settlement regulation, and more. Thoughtfully manage and eliminate life settlement transaction risk through stringent due diligence procedures. Otherwise, even the simplest aspects of such a transaction may prove to be ticking time bombs.

Assessing Clients’ Life Settlement Offers

Katt, Peter C. (2002) Journal of Financial Planning

The life settlement firm isn’t in the business to determine what is in the best interests of prospective sellers, so policy holders should have an independent financial analysis done before a policy is sold.
Abstract |Local file in Dropbox|

Life settlement refers to the purchase of unneeded life insurance policies. This article examines whether life settlements are likely to be of value to your clients. A discussion of the difference between needed and wanted life insurance seems to miss the point in the context of life settlements that, by definition, only involve insureds who are in much worse health than when they bought their life insurance policies. The only reason this so-called life insurance secondary market can exist is because the subject policy has become much more valuable due to the insured’s poor health. This makes such a policy anything but unneeded.

What Every CPA Should Know About Life Settlements

Bruno, Susan J. (2008) Journal of Accountancy

To obtain an ideal position to advise clients about life settlements, CPAs should understand the life settlement process and learn criteria for qualifying clients and life settlement companies.
Abstract |Local file in Dropbox|

For individuals 65 and older, a life insurance policy may represent an untapped asset that they are likely totally unaware of. Until recently, the owner of an unneeded or unwanted policy had two options: sell the policy back to the company that issued it for its cash surrender value or allow it to lapse. Now there’s a third and potentially better option in the secondary market, also known as life settlements. CPAs, especially personal financial specialists, are in an ideal position to advise clients about life settlements, but they must first understand the life settlement proposition. This article presents an outline of the process, followed by guidelines for who is a good candidate for life settlement and tips for getting the best price for the policy from a well-qualified settlement company.

Life Settlements: Means for Cashing In Key-Person Policies

Simon, Larry A. (2005) Financial Executive

When an insured key person retires or resigns, instead of cancelling its corporate-owned policy and taking the cash-surrender value, if any is remaining, the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well.
Abstract |Local file in Dropbox|

When an insured key person retires or resigns, the company often cancels its corporate-owned policy and takes the cash-surrender value, if any is remaining. Life settlements provide a viable and attractive option: the company can sell the policy, be rid of any future premium obligation and receive a lump sum in cash well above the cash-surrender value. In a nutshell, a life insurance policyholder sells the benefits of the policy to an investor. Most investors do not directly negotiate with policyholders; rather, they provide financing for life settlement companies that facilitate buying the policies. Policy owners should insist that their agents and brokers perform due diligence by gathering information from several competitive life settlement companies.

New Value in Old Policies

Alexander, Neil (2011) Journal of Accountancy

Clients can recover significant wealth that may betrapped in unneeded life insurance.
Abstract |Local file in Dropbox|

Many clients have life insurance policies they view as unnecessary because they no longer meet their original need. As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. JE McGowan Consulting estimates the potential secondary market for life insurance policies exceeds $18 billion annually. Before clients abandon old policies, CPAs should step in and help them recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. CPAs can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket. Determining if selling a policy is a good idea is a relatively easy process for CPAs – and potentially lucrative for policyholders.

CPAs and Life Settlements: Due Care, Competence, and Objectivity

Roth, Ronald M (2004) CPA Journal

A life settlement can remove the policy from the taxable estate, avoiding application of the three-year rule under IRC section 2035, in order to transfer additional assets tax-free to descendents.
Abstract |Local file in Dropbox|

In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products.

Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Fasano, Michael V. (2006) National Underwriter

Life and life settlement industries have more to gain than to lose from each other.
Abstract |Local file in Dropbox|

The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate. A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity. The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other. Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together.

Life Settlements: Risk Management Guidance for Professional Advisors and Fiduciaries

Leimberg, Stephan R.; Whitelaw, E. Randolph; Weber, Richard M.; Colosimo, Liz (2006) Estate Planning

Institutionally-funded providers offer purchase programs through which they pay the cash offer, and all future premiums, while the policy seller retains a reduced death benefit with no premium payment responsibility.
Abstract |Local file in Dropbox|

This first part of a two-part series article explores the elements of life settlements, the operation of the secondary life insurance market, and the duty of estate planning advisors to consider life settlements for their clients. In this article, the authors will explain why professional advisors and fiduciaries must understand the pros and cons of life settlements, how professionals can determine the economic value of life settlements on behalf of their clients, and how advisors can ensure a life settlement transaction is conducted in an ethical, legal, and economically responsible manner. A life settlement is the sale to a third-party purchaser of an in-force life insurance policy for its fair market value. Life settlements frequently involve policies that are failing because they lack sufficient cash value to pay the annual insurance costs and/or the policy owner can no longer afford the premium payments. Professionals should be aware that institutionally-funded providers offer purchase programs that address common life insurance management problems.

Inside the Life Settlement Industry: A Provider’s Reflections on the Challenges and Opportunities

Seitel, Craig L. (2007) Journal of Structured Finance

Industry maturation means shifting providers’ focus from managing the supply chain to creating a value chain.
Abstract |Local file in Dropbox|

As a portal to institutional investors and a gateway to settlement brokers, the provider plays a pivotal role in the secondary market supply chain. This article discusses key issues and challenges faced by providers in the current life settlements market. Attracting stable sources of financing is “job one” and critical to the success of a provider company. From the regulators’ and legislators’ perspective, a primary focus will center on transaction transparency and disclosure to the consumer of all commissions paid. Operational challenges include staying abreast of licensure and compliance issues, developing teams of highly skilled life settlement professionals, credentialing industry professionals, developing robust data analytics and data management capabilities, addressing privacy issues, conducting due diligence on investors, and educating novice brokers so as to better manage product flow. As the life settlements industry matures, sustaining the momentum will require a shift away from “managing the supply chain” to “creating a value chain” that emphasizes greater value and transparency to the consumer.

Life Settlements: Product Flow, Opportunities and Constraints

McNealy, Sean; Frith, Marlene H. (2006) Journal of Structured Finance

In sizing up the life settlement marketplace, the lens that should matter most to those who are following the industry should be the perception of those on the receiving end of the product—senior consumers.
Abstract |Local file in Dropbox|

There is little doubt that the life settlement industry has taken a quantum leap forward over the past six years, and a variety of indicators point to the fact that the industry is poised for remarkable growth over the next few years. Public awareness and acceptance of the product has gained traction as thousands of seniors turn to the secondary market each year to maximize the value of their unwanted life insurance policies. In addition to the fact that institutional investors are fueling the product’s growth, most insiders agree that the marketplace is being propelled by a financially sophisticated, aging population, as they discover that an economically sensible exit strategy from unwanted life insurance policies does indeed exist. Although thousands of life settlement transactions are being sourced through agents, brokers, and providers, much of the market potential remains untapped due to product-flow constraints. Furthermore, approximately 80% of the policies presented to funders never make it to the cash register for various reasons. This article presents a general overview of the life settlement market, examines the dynamics and players involved in product flow, and identifies the main drivers and constraints in sourcing policies at the point of sale.

portfolio

Financially Diversified Portfolios with Alternative Investments: The Impact of Life Settlements

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Journal of Wealth Management

Life settlement funds can reduce portfolio risk in combination with fixed income and equity indexes and commodities due to low or inverse correlation.
Abstract |Local file in Dropbox|

This study investigates whether the inclusion of life settlement (LS) funds in the formation of diversified portfolios contributes significantly to the mitigation of market risk and enhances portfolio performance. The authors construct efficient portfolios from approximations based on Markowitz’s portfolio theory by using LS funds in combination with fixed income and equity funds, gold, energy, and agricultural commodities. With nine funds representative of seven international financial markets, they find that LS funds are an effective approach to investment diversification, given their low correlation with the other proposed assets. Specifically, their results suggest that LS funds provide the largest diversification and risk-reduction benefit in combination with fixed income, equity, and commodities funds. The benefit is reduced, however, when the exchange rate effect is considered.

Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds

Bajo-Davo, Nuria; Mendoza-Resco, Carmen; Monjas-Barroso, Manuel (2013) Geneva Papers on Risk and Insurance

The introduction of life settlement funds in investment strategies produces greater value due to their low correlation with the other financial asset classes, even lower than the correlations between fixed income and equity indexes.
Abstract |Local file in Dropbox|

This article examines the formation of efficient portfolios using mutual funds that invest in life settlements in combination with fixed-income and equity index funds. We investigate the optimal weighting of these assets and their contribution to performance and portfolio risk. We find a significant negative correlation between the selected life settlement funds and certain U.S. and European fixed-income and equity funds. Furthermore, these correlations are lower than the correlations between the index funds that replicate each other. These results suggest that life settlement funds are an appropriate financial instrument to achieve greater diversification for a portfolio made up of a fund of funds and to improve fund performance as they provide a fixed return with a lower level of risk.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Extending the Efficient Frontier through Life Settlements

Dorr, David C. (2008) Journal of Structured Finance

Non-correlation allows life settlements to push the efficient frontier, but not to be exempt from contraction in market liquidity.
Abstract |Local file in Dropbox|

With the increasing acceptance of life settlements as an established asset class, institutional investors have begun to take serious notice that life settlements offer an attractive advantage because of their low correlation to other asset classes. Indeed, since modern portfolio theory is largely based upon the diversification of assets with low or negative correlations, it follows that incorporating pools of life insurance or longevity-linked instruments into a portfolio of diverse assets can significantly enhance a portfolio’s performance. This article goes beyond this basic observation to explain why longevity and mortality-linked instruments will play an increasing role in the future development and construction of institutionally managed portfolios.

risk

An Exploration of Mortality Risk Mitigation

Perera, Nemo; Pearson, Levi (2007) Journal of Structured Finance

Longevity risk of life settlements can be hedged through life-contingent, single-premium annuity or longevity swap.
Abstract |Local file in Dropbox|

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy’s future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others’ risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

A Life Settlement Mosaic

Katt, Peter C. (2008) Journal of Financial Planning

Most life settlement investments haven’t matured and profits are almost certainly an illusion.
Abstract |Local file in Dropbox|

The author’s life settlement views are formed from his experiences with clients. Since he is solicited by clients and not the other way around, he takes on what is brought to him. The market for the buying and selling of life insurance policies for investment purposes had a rational basis in the beginning. Almost all other possible life settlement situations should result in the policyowner retaining the policy – at least until the policy is near termination. The life settlement industry and their solicitors have created the image that many policy owners often come to the rational conclusion they want to sell their life insurance policies and then contact an agent. The appetite for doing life settlement transactions has become so great that the industry has convinced itself that life insurance is so mispriced that the policies of insureds in the same health are attractive targets as well.

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

Risk Mitigation for Life Settlements

Perera, Nemo; Reeves, Brian (2006) Journal of Structured Finance

Although rating agency requirements and debt holder covenants mandate basic risk-transfer protocols to be utilized, savvy investors actively deploy sophisticated risk transfer mechanisms that combine equity and insurance, to exploit investment value in life insurance assets and create above-par returns.
Abstract |Local file in Dropbox|

Investors seeking new structures for acquiring policies in the life settlement market encounter several underlying risks unique to the asset class. Those risks, described in this article, include contestability risk, missing body risk, insurable interest risk, incorrect-purchase-price risk, life insurance company credit risk, cost-of-insurance risk, and longevity risk. Some risks can be easily mitigated, but others require more complicated risk transfer mechanisms that combine financial products with insurance products. These products range from contestability coverage to more sophisticated mortality risk transfer constructs that blend equity derivative products with property casualty insurance. As the life settlement market evolves, risk mitigation will play an increasing role in reducing volatility and enabling predictable returns to allow for more institutional capital participation. Knowledge about the risks and the available risk mitigation solutions becomes a must for prospective investors interested in entering into the life settlement market.

Life Settlements: Investors Beware

Keenan, R. Mark; Seltzer, Steven (2006) Journal of Payment Systems Law

Given the complexity of the market and the differing practices used by regulators, legal counsel should be retained before any investments in life settlements are made. Are
Abstract |Local file in Dropbox|

The authors suggest that investors in life settlements should complete their due diligence before buying.

Performance and Risks of Open-End Life Settlement Funds

Braun, Alexander; Gatzert, Nadine; Schmeiser, Hato (2012) Journal of Risk and Insurance

Latent risks associated with life settlement funds, such as liquidity, longevity, and valuation risks, cannot be captured by classical performance measures, but should be considered by investors.
Abstract |Local file in Dropbox|

In this article, we comprehensively analyze open-end funds dedicated to investing in U.S. senior life settlements. We begin by explaining their business model and the roles of institutions involved in the transactions of such funds. Next, we conduct the first empirical analysis of life settlement fund return distributions as well as a performance measurement, including a comparison to other asset classes. Since the funds contained in our data set cover a large fraction of this relatively young segment of the capital markets, representative conclusions can be derived. Even though the empirical results suggest that life settlement funds offer attractive returns paired with low volatility and are virtually uncorrelated with other asset classes, we find latent risk factors such as liquidity, longevity, and valuation risks. Since these risks did generally not materialize in the past and are hence largely not reflected by the historical data, they cannot be captured by classical performance measures. Thus, caution is advised in order not to overestimate the performance of this asset class.

sales

Life Settlements as a Viable Option

Ingraham, Harold G.; Salani, Sergio S. (2004) Journal of Financial Service Professionals

The emergence of the secondary market for life insurance policies has been pro-competition and pro-consumer.
Abstract |Local file in Dropbox|

The rapid development of the life settlement market since its inception in the mid-1990s has resulted in a vibrant secondary market for life settlement policies. This article describes the purchase process for life settlements and identifies target markets. Situations where life settlements are inappropriate are also identified. The article sets forth the key due diligence issues involving financial advisers regarding life settlements, and it calls attention to the significant expression of the funding sources emerging in this market.

Using Life Settlements to Tap the Value of Hidden Assets

Friedman, Lori (2004) CPA Journal

In select circumstances, life settlements provide a win-win way to receive value in excess of the simple cash value of a policy, while gaining a tax advantage and putting more cash into a business, an acquisition, or an individual’s retirement.
Abstract |Local file in Dropbox|

In the past, the owner of a life insurance policy who no longer wanted to retain the contract had two options: allow it to lapse or surrender the policy. A new option can tap the hidden value of these policies. Under the right circumstances, life settlements provide value in excess of the cash value built up within these policies. In many respects, it works like found money for a company or individuals who might otherwise simply walk away from a policy rather than continue to pay premiums.

Life Settlements: A Legitimate Financial Planning Tool

Gardner, Rick (2005) Journal of Practical Estate Planning

A broker who has direct contracts with many funding companies has a much better opportunity to obtain the best offer for policyholders.
Abstract |Local file in Dropbox|

A life settlement is the sale of an existing life insurance policy to a third party. Life settlements are becoming recognized by planning professionals as a viable financial planning tool. Reasons why a client may want to consider selling an insurance policy include: 1. insurance needs have changed, 2. premiums have become unaffordable or inconsistent with current needs, 3. estate planning goals have changed, 4. cash is needed to fund a different life insurance policy, annuity, or investment, 5. funds are needed for long-term health care, and 6. funds are needed as a source of cash for charitable giving. Values-based case studies are presented. Total premiums paid by the policy owner are nontaxable and are the owner’s cost basis. If the cash surrender value is greater than the total premium paid, the difference would be treated as ordinary income. It is important to choose a life settlement broker who shows a steadfast commitment to doing what is best for the client. A good broker will diligently seek out and negotiate the highest offer.

Turn Unneeded Policies into Cash

Warring, James D. (2005) Journal of Accountancy

A life Settlement can be a better alternative than surrendering a policy, especially with the possible repeal of the federal estate tax still on the horizon.
Abstract |Local file in Dropbox|

Life insurance planning isn’t always about making sure someone has enough coverage. It’s also about finding solutions for people who have too much. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option-a life settlement-to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured’s death. A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy’s face amount and cash surrender value as well as other factors, such as the insured’s health, age and the current policy premium.

Reaching Affluent Senior Life Settlement Prospects

Simon, Larry A. (2005) National Underwriter

Do: use photos of seniors enjoying their wealth, include clippings of articles you have written for local publications; don’t: ignore state licensing rules, violate state life settlement advertising filing requirements.
Abstract |Local file in Dropbox|

Selling a life insurance policy through a life settlement may be a major step for a policyholder, even if the policyholder is a high-net-worth client. Marketing life settlements to this group can present a unique set of challenges. These guidelines should help: 1. Members of this group are very careful about those with whom they do business. 2. Hard sells rarely work on affluent seniors. 3. Photos send a message. 4. Seniors have time to read. 5. Before publishing or distributing advertising or marketing materials, and when designing your Web site, always give careful consideration to legal and regulatory requirements in the states in which your information will be disseminated. 6. Licensing requirements also should be considered carefully.

Life Settlements: A Second Look at a Secondary Market

Brecka, Gary; Virkler, Tom (2004) Journal of Financial Service Professionals

While unable to escape its history, the life settlement market has nonetheless avoided repeating mistakes of that history by emerging as an important and growing element of the financial planning world.
Abstract |Local file in Dropbox|

The unacceptable conditions and environment of the formative life settlement market have, understandably, left a bad impression in the minds of many within the life insurance planning industry. However, this dappled history of viatical sales should not predispose a planner to avoid a thorough examination and understanding of the current, rapidly expanding market for life insurance contracts. Today’s life settlement transactions bear little or no resemblance to the viatical sales of yore. Owners of an insurance contract can collect the proceeds payable under the contract upon the death of the insured, or they can sell the policy for its current market value. Institutional investors have come to realize that big blocks of properly underwritten policies acquired through life settlements can form a very predictable, very conservative, and very profitable source of income. Life insurance planners must not avoid involvement in or proper encouragement of life settlement options in the financial plans of their clientele.

Life Settlements: An Insurance Planning Tool

Greenberg, Valerie (2004) CPA Journal

Ideal institutional funders are not self-creared companies or trusts that hold investment capital, but world-recognized financial institution who can provide safeguards for advisors and clients.
Abstract |Local file in Dropbox|

Life settlements are a new insurance planning tool for older individuals in which a third party, preferably institutionally funded, purchases a senior’s existing life insurance policy for more than its cash surrender value (CSV). Life settlements are especially valuable when used for trustees. Life expectancy on life settlements can be up to 15 years. When looking at existing life insurance policies, the following situations may be possibilities for life settlements: business succession, trust administration, estate or financial planning, commercial lending, bankruptcy, divorce, charitable giving, and discontinued employee or executive retirement programs. A policy carried on the books as “no value” and ready to be dropped may turn out to be worth a great deal in a life settlement. Other types of policies that can be purchased include term, universal, whole life, variable, and group. Policies can be owned by individuals, trusts, and companies.

Helping Your Clients Sell Unneeded Policies

Simon, Larry A. (2004) National Underwriter

A good settlement candidate has an universal insurance policy with above half a million coverage and a life expectancy between 2 to 10 years.
Abstract |Local file in Dropbox|

The majority of life insurance policyholders let their policies lapse or surrender the policies for a minimal cash value. The wealth lost as a result of these policy surrenders is significant. The National Association of Insurance Commissioners, Kansas City, MO, estimates that in 1996, for example, nearly $1.5 trillion in life insurance face amount lapsed or was canceled by policyholders. Today, the life settlement market is giving financial advisors the means to help policy owners extract the wealth trapped in unneeded life insurance policies. Unlike viaticals, life settlements are based on the proposition that some insured individuals no longer want, need or can afford their coverage. Life settlements aren’t for everyone. A good candidate typically has $500,000 or more in universal life coverage. Life settlements are designed for people who are not suffering from a life-threatening or catastrophic illness and whose life expectancy is about 2 to 10 years.

securitization

Life Settlements Today: A Secret No More

Ziser, Boris (2006) Journal of Structured Finance

As the industry matures, a dramatic increase in life settlement securitization transactions is expected.
Abstract |Local file in Dropbox|

The life settlement market continued to expand in 2005. The expansion has led to an increase in the recognition of this asset class and more traditional lenders have begun to enter the market. Life settlement transactions can be complicated and require structuring expertise to address various issues, including tax and securities law issues. The market is waiting for securitization to become an available vehicle through which industry participants will be able to access the capital markets. As the life settlement market continues to develop and issues such as longevity risk are addressed, we should see an increase in life settlement securitization transactions.

Delta Hedging IO Securities Backed by Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2009) Journal of Structured Finance

Interest only and principal only securities, created by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization, allows a more refined redistribution of life extension risk and of interest rate risk.
Abstract |Local file in Dropbox|

Investors in securitized senior life settlements are exposed to longevity risk. The value of their security will decrease if life settlers live above life expectancy because premia will have to be paid for a longer period and the death benefits are not received at life expectancy but at a later date. The authors examine a block of life settlements and show how it is possible to create an IO (interest only) security, and a PO (principal only) security by stripping apart the premia from death benefits for the pool of life settlements backing a life settlement securitization. They show how it is possible to hedge the value of this IO security.

Longevity Trading: Bridging the Gap Between the Insurance Markets and the Capital Markets

Dorr, David C. (2007) Journal of Structured Finance

Trading in life settlements and the future of the sector – a liquid life settlement market – requires standards to assist in the efficient transfer of risk and assets.
Abstract |Local file in Dropbox|

The recent ability to trade longevity risk through the use of life settlements, whether for speculation, investment, or as a hedge, has far reaching implications for the entire financial sector. Currently, there are two active markets that trade in life settlements: the secondary market and the tertiary market. The secondary life insurance market is where a life insurance policy first enters the marketplace. The tertiary market is where individual policies and portfolios of policies come back into the market and are among between financial institutions. By providing the industry with secure, business-to-business trading platforms specifically designed for life settlement transactions, online platforms address many of the inefficiencies and shortcomings currently facing this industry. Online exchanges lower the fixed costs associated with brokering, underwriting, and purchasing a life insurance policy and consequently provide the opportunity for smaller policies to be brokered in the secondary market. Electronic trading platforms provide the ideal solution to monitor, update, and report upon the requlatory requirements of both buyers and sellers. Transparency and disclosure is probably the most compelling justification for the use of electronic platforms. For securitization to develop and flourish, an electronic exchange will need to be in place to facilitate trades and transactions.

Securitization of Life Insurance Assets and Liabilities

Cowley, Alex; Cummins, J. David (2005) Journal of Risk and Insurance

Life insurance and annuity securitizations will not achieve the level of success of mortgage-backed securities and other types of asset-backed securities until a substantial volume of transactions reaches the public markets.
Abstract |Local file in Dropbox|

The material in this article has been co-authored by Alex Cowley and J. David Cummins and reflects solely the opinion of the co-authors and not that of Lehman Brothers or the Wharton School. The article should not be construed as a product of Lehman Brothers or its Research Department. It is for informational purposes only and has been compiled based upon publicly available sources of data. The co-authors assume full responsibility for its contents. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are solely those of the co-authors and are subject to change without notice. Readers are advised to make an independent review regarding the economic benefits and risks of any of the transactions described herein, including without limitation purchasing or selling any of the financial instruments mentioned in this article, and must reach their own conclusions regarding the legal, tax, accounting, and other aspects of any transaction involving the financial instrument in relation to their particular circumstances.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Acquiring Life Insurance Portfolios: Diversifying and Minimizing Risk

Smith, Brian B.; Washington, Stephen L. (2006) Journal of Structured Finance

Institutional investors have been actively buying insurance policies while securitizations of life insurance portfolios have been much rarer, since securitization demands a tighter band of policies.
Abstract |Local file in Dropbox|

Though the secondary market for life insurance policies has only recently developed, institutional investors and others involved in the life settlement industry are witnessing early signs of a tertiary market for whole portfolios of life insurance policies that have been formed over the past several years through multiple life settlement transactions. For institutional investors that are seeking either new investment opportunities or to diversify their existing investment portfolios, a tertiary market for portfolios of life insurance policies may present new investment opportunities and a means to minimize risk in a new class of investment assets. This article explains certain risks associated with the purchase of life insurance portfolios such as contestability risk and uncertain availability and quality of information on individual policies. The authors explain how life settlement providers can be helpful in the securitization of life settlement portfolios. They anticipate significant growth over the next several years in the tertiary market for life insurance portfolios.

Securitization of Life Settlements: A Pivotal Phase in the Product Life Cycle

Ziser, Boris; Seitel, Craig L. (2005) National Underwriter

In spite of the structural complexities in securitizing life settlements, it is a growing asset class that has captured the interest of institutional investors from around the world.
Abstract |Local file in Dropbox|

The article focuses on the increased interest from both foreign and domestic institutional founders in the life settlement marketplace that helped to redefine the industry and bolster its credibility within the financial services arena. Although life settlements evolved from the viatical settlement market in the 1980s, which was dominated by individual investors who purchased policies from terminally ill AIDS patients, the industry has undergone a change resulting in a shift in the product’s demographic focus. With this shift in focus from terminally ill insureds to high-networth seniors generally over age 70 seeking an exit strategy from unwanted policies, the industry entered a new era of sophistication and a new stage of the product life cycle that brought greater credibility and a clearly defined value proposition for all players in the life settlement supply chain.

Betting on the Lives of Strangers: Life Settlements, STOLI, and Securitization

Martin, Susan Lorde (2010) University of Pennsylvania Journal of Business Law

Life insurance companies should reconsider the amount they pay out in surrender value so that life settlement offers would not look so attractive.
Abstract |Local file in Dropbox|

Life insurance serves the important purpose of providing a means for families and businesses to survive the premature death of a person whose support they require to maintain themselves. Over time, life insurance has become a much more sophisticated financial product incorporating savings plans, mutual fund investments, and securitizations. This article recounts the history of lfe insurance including the development of the insurable interest doctrine. It describes life settlements, especially strangeroriginated life insurance (STOLI) policies, which represent a particular abuse of the purpose of life insurance. The article discusses the securitization of pools of life insurance policies, reminiscent of the securitization of sub-prime mortgages. Then state and federal attempts at regulation and a variety of lawsuits are summarized. The article concludes that life insurance is such an important protection for families and businesses that its availability for its primary purpose should not be compromised by becoming the basis for complicated, misunderstood, and, in some cases, fraudulent financial products.

Securitization of Senior Life Settlements: Managing Interest Rate Risk with a Planned Duration Class

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Journal of Financial Transformation

A pool of life settlements can be funded with two classes of securities: one with a duration insulated from variations in life expectancy, and the other with a duration highly sensitive to variations in life expectancy.
Abstract |Local file in Dropbox|

Using duration to measure interest rate risk for securities such as MBS, callable bonds, and securities backed by life insurance policies is problematic because for these securities the timing of cash flows is uncertain. In order to measure duration for securities with embedded options like callable bonds and MBS, cash flow timing must be assumed or modeled. In the case of senior life settlements, duration is only a useful summary of interest rate risk if the estimated life of the insured is accurate. It is precisely because the life of the insured is uncertain that the duration of a pool of senior life settlement contracts will not offer a meaningful summary of interest rate risk. In this paper we illustrate how a pool of senior life settlement contracts can be funded with a capital structure that is composed of two classes of securities: one which has a duration that is insulated from variations in the life of the insured around the estimated life expectancy and the other with a duration which is highly sensitive to variations in the life of the insured around the estimated life expectancy. We name the security class with a stable duration the planned duration class (PDC) while the class with the unstable duration is called the support duration class (SDC)

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

STOLI

Long Live Life Settlements: The Current Status and Proposed Direction of the Life Settlement Market

Koutnik, Michael (2013) Marquette Law Review

Coupling a strict judicial adherence to incontestability clauses with state codification of a five-year holding period on newly issued policies would help stabilize the market by providing certainty to investors of validly settled policies while at the same time reducing the financial benefit offered by STOLI transactions.
Abstract |Local file in Dropbox|

The payment of life insurance policy benefits to the insured’s suriving spouse or child is something with which most people are both familiar and comfortable. However, when those benefits are instead paid to a third party investor who has no interest in the insured’s life, some people cry foul. Yet this is the basic premise of the secondary market for life insurance. In this market, insured individuals assign their policy benefits to an investor who agrees to pay the insured a lump sum of money in addition to assuming responsibility for the policy’s premiums. While the underlying concepts that support the secondary market for life insurance policies are not new, the young and imperfectly regulated market has been strained by an increase in supply and demand for these products. Because of the limited guidance within the market, fraud and uncertainty have pervaded many transactions. As a result, many validly settled policies may face challenges in the courts. In an effort to help stabilize and legitimize the secondary market, this Comment recommends coupling a strict judicial interpretation of the incontestability periods contained in many life insurance policies with a five year holding period on newly issued life insurance policies. This framework will help deter fraudulent transactions while promoting certainty among investors.

Virtues and Evils of Life Settlement

Breus, Alan (2008) Journal of Accountancy

Under the right conditions, sale of a life interest may be a good policy.
Abstract |Local file in Dropbox|

Life settlement, boosted by aggressive marketing, has developed into a major secondary market for existing life insurance policies. The rise of this now $15 billion annual market has brought with it fresh regulatory scrutiny to crack down on the parallel growth of stranger-originated life insurance (STOLI). Given the growing importance of this segment of the life insurance business, CPAs should understand how and when life settlement can be a good investment for clients as well as the possible tax implications and hazards.

Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

Guttery, Randall S.; He, Enya (Min); Poe, Stephen (2012) Journal of Insurance Issues

While additional regulation of STOLIs may be appropriate to provide the consumer policy owner/insured with adequate disclosures and other safeguards, regulatory prohibition of STOLI transactions seems unnecessary, particularly when its objective is to protect the interests of insurance carriers and third‐party investor groups.
Abstract |Local file in Dropbox|

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.

Stranger Originated Life Insurance: Finding a Modern Cure for an Age-Old Problem

Fleisher, Maria (2010) Cumberland Law Review

Because of all of the risks involved, it is important that all states craft laws that will operate to eradicate harmful STOLI transac- tions, yet provide protection for seniors’ rights to participate in the legitimate life settlement market.
Abstract |Local file in Dropbox|

“There’s no reason to be the richest man in the cemetery. You can’t do any business from there.” - Colonel Sanders

Stranger-Owned Life Insurance (‘SOLI’): Killing the Goose That Lays Golden Eggs!

Leimberg, Stephan R. (2005) Estate Planning

In a charitable context, investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitable-minded, and generous donors, which could hurt the charities and trigger a sea change in the way all life insurance is taxed and priced, and in extreme cases encourage criminal activity of the worst kind.
Abstract |Local file in Dropbox|

Stranger-Owned Life Insurance (SOLI) is a rapidly spreading virus that is infecting both individuals and charities. The end result is likely to be a lose-lose-lose situation for the public, the insureds, their families, and the insurance and estate planning communities. In fact, everyone is likely to lose - except the promoter-marketers and third-party investors they assemble to finance what is clearly an end-run around centuries old insurable interest laws. The promoter’s claim is that this arrangement is “a life insurance windfall for charity - without buying a policy or paying anything at all.” These are highly complex and speculative arrangements in which investors “borrow” the insurable interests of charities to purchase insurance coverage on the lives of the organization’s older, wealthy, charitably-minded, and generous donors.

Viatical and Life Settlement Securitization: Risks and Proposed Regulation

Lazarus, Eli Martin (2010) Yale Law & Policy Review

A recently enacted law promises to alleviate some of the latent dangers in life settlement securitization, but likely interpretations of that law will not adequately address the many species of securitization beyond those that sparked the Great Recession.
Abstract |Local file in Dropbox|

A new industry grew out of the AIDS crisis of the 1980s: the secondary trade in life insurance policies. Victims of HIV and AIDS faced certain death-half within the first year after diagnosis, and eighty-five percent within three years. Meanwhile, AIDS rendered its victims both physically debilitated and socially untouchable, often cutting them off from employment and employer provided health insurance. Treatment, though largely ineffective, cost the average patient up to $8o,ooo. Those infected-at first, predominantly gay men-were often abandoned by their families, and government programs provided little support.

6-Month Life Settlement Outlook: More Growth, More Regulation

Simon, Larry A. (2008) National Underwriter

A push for more uniform standards that effectively address STOLI and aim to stop fraud is expected, protecting both consumers and the professionals aiding seniors in financing planning goals.
Abstract |Local file in Dropbox|

The life settlement market will continue to expand and evolve in the second half of 2008. Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market. Since introduction of the National Conference of Insurance Legislators (NCOIL) and National Association of Insurance Commissioners (NAIC) model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry. This includes 5 bills based on the NAIC model and five based on the NCOIL model.

Betting on the Lives of Strangers: Life Settlements, STOLI, and Securitization

Martin, Susan Lorde (2010) University of Pennsylvania Journal of Business Law

Life insurance companies should reconsider the amount they pay out in surrender value so that life settlement offers would not look so attractive.
Abstract |Local file in Dropbox|

Life insurance serves the important purpose of providing a means for families and businesses to survive the premature death of a person whose support they require to maintain themselves. Over time, life insurance has become a much more sophisticated financial product incorporating savings plans, mutual fund investments, and securitizations. This article recounts the history of lfe insurance including the development of the insurable interest doctrine. It describes life settlements, especially strangeroriginated life insurance (STOLI) policies, which represent a particular abuse of the purpose of life insurance. The article discusses the securitization of pools of life insurance policies, reminiscent of the securitization of sub-prime mortgages. Then state and federal attempts at regulation and a variety of lawsuits are summarized. The article concludes that life insurance is such an important protection for families and businesses that its availability for its primary purpose should not be compromised by becoming the basis for complicated, misunderstood, and, in some cases, fraudulent financial products.

The Life Settlement Industry Tests State Insurable Interest Rules

Kozol, George B. (2009) Journal of Financial Service Professionals

While this litigation may temporarily destabilize the life settlement business, the increase in supply of policies associated with the aging of the baby boomer generation and the increase in demand for uncorrelated assets will fuel stability and growth in the settlement business.
Abstract |Local file in Dropbox|

As world financial markets become more interdependent, the demand for uncorrelated investments continues to increase. Institutional investors and sophisticated individual investors are searching for investment returns that are not linked to bonds, equities, or commodities. In the late 1990s investment bankers and hedge fund investment managers turned to the secondary market for life insurance to create such an investment class-life settlement-backed securities. The demand for the new securities had been so great, prior to the financial crisis that began last fall, that syndicators and promoters required amounts of life insurance on older-age individuals that exceeded the supply available through normal functioning of the secondary market. The unprecedented demand for life policies on older-aged individuals produced life insurance applications and arrangements that tested the boundaries of state insurable interest laws. This article will explain the tension between life settlement-backed securities and state insurable interest laws. The article also will overview regulatory developments that should assuage this tension.

Betting on Death or Just Cashing In?: Taking a Look at the Life Settlement Industry Through the Lens of Kramer v. Phoenix Life Insurance

Brunau, Terence John (2012) Quinnipiac Probate Law Journal

The challenge is to create a set of laws that prevent investors from coercively betting on death at the expense of defenseless policy holders, but which also allow people to just cash in.
Abstract |Local file in Dropbox|

The article presents information on the Stranger Originated Life Insurance (STOLI) transactions with reference to the trial of Kramer v. Phoenix Life Insurance Co. It discusses the insurance law of New York based on selling of life insurance policies to strangers. It further focuses on the origin of STOLI and the decisions of the New York Court of Appeals. It also discusses the need of precise regulations for protecting legitimate life settlements.

A Review of Legislation Related to Stranger-Oriented Life Insurance

Cole, Cassandra R.; Mccullough, Kathleen A. (2008) Journal of Insurance Regulation

Both NAIC and NCOIL created model acts relating to STOLI, the former favored by the ACLI who believes the five-year waiting period for wholly financed policies will make STOLI transactions less attractive to investors, while the latter supported by LISA who argues taking action on the front end of the life insurance sale by determining settable policies better eliminates these transactions.
Abstract |Local file in Dropbox|

In recent years, there has been a growing concern regarding a trend in life insurance settlements know as stranger-originated life insurance (STOLI). These transactions, which typically target the elderly, have become a public policy concern for insurers, regulators, and consumers. This article provides a brief discussion of the growth in the secondary life insurance market, including STOLI transactions, and a review of the major issues surrounding these types of transactions. The paper also examines the two model acts developed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators related to these issues and identifies the states that have adopted some type of legislation designed to prohibit or place restrictions on STOLI transactions.

An Unsettled Matter of Life and Death: A Public Insurance Settlement

Gabel, Terrance G.; Scott, Clifford D. (2009) Journal of Public Policy & Marketing

Regulatory inadequacies allow life settlement marketers to take advantage of customer vulnerability incited by unfavorable health or economic situations, and a reform is in order.
Abstract |Local file in Dropbox|

Life insurance settlement (LIS) is a US$15 billion global industry and is expected to grow tenfold or more by 2040. It involves the controversial practice of investors acquiring the life insurance policies of living people and then receiving the proceeds of the policy after the death of the insured. This article examines LIS exchange and consumption from a consumer-focused public policy and marketing perspective. The authors find that the vast potential of LIS to meaningfully expand consumer choice has yet to be fully realized as a result of (1) LIS consumers often being inherently at a high risk of experiencing vulnerability, (2) incosistent and inadequate industry regulation, and (3) ethically or legally questionable industry marketing practices. Public policy recommendations are formulated with a view toward facilitating regulatory reform that benefits both LIS consumers and ethical LIS marketers.

STOLI on the Rocks: Why States Should Eliminate the Abusive Practice of Stranger-Owned Life Insurance

Mathews, Eryn (2007) Connecticut Insurance Law Journal

STOLI creates dangerous financial and legal risks for purchasers, investors and life insurance companies, and also raises serious ethical concerns.
Abstract |Local file in Dropbox|

The life insurance market is a burgeoning field of sophisticated investment transactions. A life insurance policy, traditionally an illiquid asset, has developed into an asset-backed security which has proved quite profitable to investors and insureds alike. These transactions allow insureds under certain circumstances to sell their policies to investors. The development of this secondary market has injected competition into the life insurance business and resulted in better products with more options for consumers.

Another Active Year in the Life Settlement Industry

Ziser, Boris (2008) Journal of Structured Finance

The life settlment market develops, despite uncertainties caused by judical activities, and lack of insurance product covering longevity risk which delays securitization.
Abstract |Local file in Dropbox|

In the past 12 months, there has been significant growth and regulatory and judicial activity in the life settlement industry. In addition to the 28 states that regulated life settlements a year ago, several additional states have either adopted life settlement laws or have proposed legislation that is pending. One common goal shared both by states that adopted new legislation and by those that revised existing legislation was the elimination of stranger-originated life insurance (STOLI). There are two categories of proposed and pending legislation: 1) legislation based on the Viatical Settlements Model Act, and 2) legislation based on the model legislation introduced by the National Conference of Insurance Legislators (NCOIL). On the structured finance front, the continued absence of a widely available and accepted insurance product covering the longevity risk inherent in life settlements, and the dislocation in the asset-backed market as a whole, have combined to further delay the eagerly awaited arrival of a pure, rated, life settlement securitization.

STOLI on the Rocks: A Case for Practical Ethics Presentations and, Incidentally, “Lawyers Always Get Hammered”

Cavaliere, Frank J. (2015) Practical Lawyer

Life Settlements are supposed to help people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances, instead of people who have bought with the intention of conducting a life settlement.
Abstract |Local file in Dropbox|

If you are interested in some compelling cautionary tales of greed, law-breaking, and lack of ethics, then the author recommends CNBC’s American Greed series that offers entertaining mini case studies demonstrating several recurring patterns: a pervasive lack of critical thinking from victims and gatekeepers, charismatic charlatans, and lack of ethics and/or due diligence from professionals who should know better, often including lawyers. This article will look at the legal and ethical issues surrounding one of the issues profiled on American Greed, namely stranger-owned life insurance. A critic of some in the industry is Open Life Settlements. They explain that a person who cannot afford to keep up the payments on a whole life policy can benefit by selling it rather than just turning it in for the cash settlement value. Open Life Settlements helps people who have bought insurance for legitimate reasons sell policies that are now unwanted or unneeded due to changed circumstances.

The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals

Nurnberg, Hugo; Lackey, Douglas P. (2010) Journal of Business Ethics

Life settlement is pure betting, where the outcomes are determined by actuarial factors that have nothing to do with wise choices made by the investors or by the creditworthiness or profitability of companies.
Abstract |Local file in Dropbox|

Life insurance settlements, or life settlements, are life insurance policies owned by investor-beneficiaries on the lives of unrelated individuals. With life settlements, investors make substantial payments to the insured individuals upon purchasing such policies, pay any remaining premiums, and collect the death benefits upon the demise of the insured individuals. Transactions involving life settlements seem poised to become a major source of profits for investment banks, comparable in dollar amount to subprime mortgages. With life settlements, the insured individuals suffer no immediate harm, and the sale of a policy an individual owns is permissible under current law. Nevertheless, moral questions can be posed about the social values expressed by these practices, the effect of these practices on the virtue of charity, and the overall loss of social utility that will result from life settlements. We consider life settlements from utilitarian and libertarian perspectives, and then consider the effects of life settlements on social values and on individual character. On balance, we favor legislative changes in insurance and tax laws to discourage life settlements, and argue that certain forms of life settlements should be banned outright.

It’s Time To Ban IOLI

Piontek, Steve (2005) National Underwriter

Investor-owned life insurance, which moves far from the noble basis of protecting loved ones, inevitably cheapens the concept and should be banned.
Abstract |Local file in Dropbox|

It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners (NAIC) took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution. What is pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment. IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.

Deterring STOLI: Two New Model Life Settlements Acts

Kingma, Kenneth W.; Leimberg, Stephan R. (2008) Estate Planning

Some states will likely choose to take provisions from both NCOIL (National Conference of Insurance Legislators) and NAIC (National Association of Life Insurance Commissioners) acts in order to effectively eliminate stranger-originated life insurance and perceived abuses in life settlement practices.
Abstract |Local file in Dropbox|

The life settlement business, which involves the sale of life insurance policies prior to maturity, is thriving. Unfortunately, the growth of the life settlement business has been fueled, at least in part, by stranger-originated life insurance (SOLI or STOLI or SPIN-LIFE) programs where brokers or speculators encourage individuals through economic incentives such as “free insurance,” cruises, cash payments, and the like to acquire life insurance policies directly or indirectly on their lives, with the intent that the policies be sold over time to investors who have no insurable interest in their lives. The National Association of Life Insurance Commissioners (NAIC) model act moved to end STOLI and strengthen consumer protection in the life settlement area. The National Conference of Insurance Legislators (NCOIL) model act serves as an alternative to the NAIC model act. This article summarizes the NCOIL model act and provides a broad-brush comparison of the NAIC and NCOIL model acts.

An Eventful Year in the Life Settlement Industry

Ziser, Boris (2007) Journal of Structured Finance

Securitization of life settlements faces challenges from rating agencies due to inexact life expectancy predictions, and from legislative bodies such as NAIC who proposed a five-year ban against STOLI.
Abstract |Local file in Dropbox|

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

The Role of the Secondary Market for Life Insurance in Preserving a Family Business

Adams, Edward S.; Sabes, Jon R. (2009) Family Business Review

Life settlements give a family business a measure of security in the face of market downturns, the death of a key business member, or other changed circumstances that disproportionately impact family businesses.
Abstract |Local file in Dropbox|

A family business may have a hidden asset that can be tapped and sued to its advantage to fight off competitive threats, access capital in difficult times, act upon growth opportunities, or diversity assets. This untapped asset is a life insurance policy. Many family businesses own life insurance to protect their owners and are ideal candidates for life settlement if they do not own a qualifying policy. This article argues that the secondary market of life insurance provides viable estate planning strategies for family businesses and should be safeguarded and preserved from the efforts of the insurance industry and other organizations to limit their use.

valuation

The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility

Stone, Charles Austin; Zissu, Anne (2012) Journal of Structured Finance

Compared to the deterministic model, the probabilistic and the stochastic valuation models diminish the need for a liquidity facility, because they project higher cash flows earlier on.
Abstract |Local file in Dropbox|

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

A Real Options Approach to Valuing Life Settlements Transactions

Mason, Joseph R.; Singer, Hal J. (2008) Journal of Financial Transformation

Black-Scholes valuation on life settlement options suggests a collection of multibillion losses for petential policy sellers should a holding period be extended as per ACLI’s proposal from 2 to 5 years.
Abstract |Local file in Dropbox|

In April 2006, the American Council of Life Insurers (ACLI) circulated a legislative proposal that would impose a 100 percent excise tax on the proceeds from the sale of a life insurance policy to a third-party within five years of the issuance of the policy. The practical effect of such a rule would be to increase the holding period for a life-insurance policy from two to five years. Although the proposal has not yet garnered sufficient support in Congress, as of April 2008, the five-year holding period was being considered as ‘model legislation’ by several U.S. states. To measure the costs of the ACLI proposal to policyowners, we introduce the real options framework of financial economics. The option to sell can be modeled using traditional Black-Scholes techniques as a European put option during the holding period and as an American put option after the holding period expires. We calculate that the senior candidates for a life settlement would instantaneously lose between U.S.$41 billion and U.S.$63 billion in option value if the ACLI’s proposal were implemented. Against these costs, one must measure the likely benefits of extending the holding period. Until such a cost-benefit analysis is performed, it would be imprudent to constrain policyholders in such a severe way.

Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2008) Applied Financial Economics Letters

Fund managers can search for life settlements a zero Macaulay duration and add them to their existing portfolio, in order to lower the weighted average Macaulay duration of such portfolio.
Abstract |Local file in Dropbox|

Senior life settlements belong to the family of fixed income securities, however, because of the negative stream of cash flows generated by the payment of yearly premia p and the only one positive lump sum received at death of the senior life settler, contrary to the other fixed income securities, senior life settlements, under certain conditions, can achieve a zero Macaulay duration. Investors interested in a hedged portfolio against interest risk could purchase such life settlements. We develop the conditions for which a zero Macaulay duration is obtained.

The Asset and Liability Sides of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2011) Journal of Structured Finance

Portfolio managers can use the measure t0, the point where the value gap between the asset and the liability component of life settlements is zero, to incorporate solvency and stability to the life settlement policy selection process.
Abstract |Local file in Dropbox|

In this article the authors define a reference time called t0, in longevity/value space, as the longevity that drives a life settlement contract to a zero value. They develop the t0 metric to show how the “longevity gap” collapses and expands as actual longevity of the pool of insured deviates from the forecasted longevity upon which the pricing of the life settlement contracts is based. The “longevity gap” or “gap” measures the value of the asset component of a life settlement contract (the death benefits), relative to the value of the liability component (the required premium payments). The longevity gap metric can be used by investors and creditors to measure the solvency of individual life settlement contracts or portfolios of life settlement contracts. Because the value of the asset side of a life settlement contract expands and declines at a different rate than the liability side when longevity changes, t0 becomes a threshold that investors can use to gauge and compare the longevity risk embedded in life settlement contracts that are being offered. The authors show that policies valued by simply discounting the stream of cash flows of life settlement contracts based on an expected longevity of the underlying population of insured can be misleading. Knowing at what longevity of the insured the policy will hit t0 offers valuable information.

Measuring the Performance of the Secondary Market for Life Insurance Policies

Giaccotto, Carmelo; Golec, Joseph; Schmutz, Bryan P. (2017) Journal of Risk and Insurance

The volatility in VLSI (life insurance policies purchased on the secondary market) returns is found to differ substantially from the smoother return series reported for life settlement mutual funds, confirming the suspicion that fund managers could smooth their performance.
Abstract |Local file in Dropbox|

We construct an index of life insurance policies purchased in the secondary market by viatical and life settlement companies. Using the repeat sales method to measure returns over our 1993-2009 sample period, we find that policy returns average about 8 percent annually compared to 5.5 percent for the S&P 500 and 7 percent for corporate bonds, but they are twice as volatile as the S&P and four times as volatile as bonds. Nevertheless, because the index return is relatively uncorrelated with stock or bond returns, life insurance policies make attractive additions to well-diversified portfolios.

Accelerated Death Benefits, Viatical Settlements,and Viatical Loans: Options for the Terminally III

Schmidt, Paula (1997) Journal of Actuarial Practice

Because of issues regarding estate tax and estate/inheritance tax treatment of the death benefit remaining after acceleration. and other issues, some insurance companies have been waiting to initiate and introduce accelerated benefits.
Abstract |Local file in Dropbox|

There are three options available for terminally ill insureds who are interested in accessing all or part of the face value of their life insurance policies: through the life insurance company (accelerated death benefits), through a viatical company (a viatical settlement), or through a viatical loan company (a viatical loan). This paper explores the definitions and tax regulations, calculations, and the claims process associated with accelerated death benefits and via tical settlements and loans.

Longevity Risk in Fair Valuing Level 3 Assets in Securitised Portfolios

Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford (2011) Geneva Papers on Risk and Insurance

Management is responsible for implementing a supportable assumptions-based valuation methodology that is transparent and controlled, so that they can present a completed valuation to the independent auditors to critique and avoid costly additional modelling.
Abstract |Local file in Dropbox|

Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation.

Securitization of Financial Asset/Liability Products with Longevity Risk

Ortiz, Carlos E.; Stone, Charles Austin; Zissu, Anne (2010) Journal of Financial Transformation

Investors should choose life settlement pools with Max[t0-LE], t0 denoting the point where the present value of the asset equals the present value of the liability.
Abstract |Local file in Dropbox|

This paper examines the securitization of financial products that have both assets and liabilities, and that are affected by longevity risk. The longevity risk is what determines the magnitude of the assets and that of the liabilities embedded in the financial product to be securitized. Examples of such financial products are senior life settlements, viaticles, reverse mortgages, or annuities.

Life Settlements: Valuation and Performance Reporting for an Emerging Asset Class

Bayston, Darwin M.; Lempereur, Douglas R.; Pecore, Anthony (2010) Journal of Performance Measurement

Internal rates of return are more appropriate for life settlements than time-weighted returns, given that life settlements are a buy and hold asset, typically purchased through closed-end vehicles where capital is committed upfront and the portfolio manager controls the timing of investing committed capital as deals become available.
Abstract |Local file in Dropbox|

The life settlements industry is an emerging asset class which, like others before it, is in the early stages of developing best industry practices specific to its unique characteristics. Best practices are needed for all aspects of a life settlement transaction: from initiation, to valuation / pricing, to transfer of ownership to an investor, to the measurement and reporting of performance, including providing appropriate disclosures. Best practices are not something that are easily developed, but they are certainly needed to improve transparency, encourage full disclosure and promote a higher standard of ethical behavior on the part of all participants. This paper seeks to delve into this relatively new asset class and address how market participants should deal with issues similar to what other new asset classes have had to face. A set of proposed Best Practices for Reporting Life Settlements Performance appears at the end of the paper, which is offered in the same spirit as the Global Investment Performance Standards that have been developed by the CFA Institute and are accepted worldwide for other asset classes (equities, fixed income, real estate and private equity).

Incorporating Longevity Risk and Medical Information into Life Settlement Pricing

Brockett, Patrick L.; Chuang, Shuo-Li; Deng, Yinglu; MacMinn, Richard D. (2013) Journal of Risk and Insurance

For pricing life settlements, the deterministic method is systematically biased, while the probabilistic method is superior and can be even further improved by incorporating medical assessments.
Abstract |Local file in Dropbox|

A life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity-related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor’s valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information.Weillustrate using several mortality tables including a new extension of the Lee-Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter’s projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

New Findings on Older People’s Life Expectancies Confirm Gompertz Law: The Impact on the Value of Securitized Life Settlements

Gavrilov, Leonid A.; Gavrilova, Natalia S.; Stone, Charles Austin; Zissu, Anne (2014) Journal of Structured Finance

The finding that mortality rates increase at an increasing rate for population older than 80, shortens life expectancies and elevates senior life settlements’ value.
Abstract |Local file in Dropbox|

Recent findings using records from the U.S. Social Security Administration’s Death Master File discredit the late life mortality deceleration theory and confirm that life expectancies follow the Gompertz law not only until the age of 80, but for many years after. The authors show how these findings have major implications on the valuation of senior life settlements and securities backed by life settlements. They illustrate the sensitivity of valuation to the incorporation of the results of recent research regarding longevity risk.

Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Stone, Charles Austin; Zissu, Anne (2008) Journal of Alternative Investments

Change in life insurance policies’ value with respect to extensions in actual life beyond life expectancy can be measured by LE-duration and LE-convexity.
Abstract |Local file in Dropbox|

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.

Coherent Pricing of Life Settlements under Asymmetric Information

Zhu, Nan; Bauer, Daniel (2013) Journal of Risk and Insurance

Policyholders’ adverse selection, resulting from asymmetric information, can explain the dicrepancy between expected and realized return.
Abstract |Local file in Dropbox|

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the “unique risks” within life settlements as recently discussed in the financial press.

On Life Settlement Pricing

Erkmen, Bilkan (2011) Michigan Journal of Business

Besides technical precision, one should not ignore the role of psychological factors in the development of the life settlement industry.
Abstract |Local file in Dropbox|

Although life settlements as financial products have been in existence and active use in financial markets for quite some time, their pricing has never reached the level of transparency and standardization envisioned by Wall Street. This lack of standardization has been and still is the major roadblock against widespread use of life settlements as investment, diversication and portfolio risk management tools. However, the recent crisis of 2007 has revealed high levels of correlation among existing financial instruments that are in widespread use. This revelation raised an avid interest in new financial instruments that show low correlation to strong market swings. In this respect, life settlements and related products such as death bonds have gained popularity among practitioners and academics alike. This paper proposes a standard pricing framework for life settlements that is consistent with existing methods of risk management and sensitivity analysis widely used in fixed income products.

The Return on a Pool of Senior Life Settlements

Stone, Charles Austin; Zissu, Anne (2007) Journal of Structured Finance

As required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.
Abstract |Local file in Dropbox|

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Life Settlements: Pricing Challenges and Opportunities

Schwartz, Jesse M.; Wood, Timothy O. (2008) Journal of Structured Finance

In the case of life-settlement assets, the availability of these margins may be squeezed as a result of the high demand for investments uncorrelated to the performance of the economy.
Abstract |Local file in Dropbox|

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters’ assessment relative to the investors’ risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

Securitization of Senior Life Settlements: Managing Extension Risk

Stone, Charles Austin; Zissu, Anne (2006) Journal of Derivatives

LE-duration, which measures the sensitivity of the value of senior life settlement-backed securities to changes in the number of years lived beyond settler’s life expectancy, will be a necessary measurement for life settlement investors.
Abstract |Local file in Dropbox|

Securitization has been an extremely important technique for managing exposure to a variety of financial risks. It allows the undesired risk to be concentrated in a small proportion of the newly created securities while largely eliminating its impact for most investors. Securitization had its very successful debut with mortgages, as a way to tap into funding from the bond market with mortgage-backed securities that were largely insulated from the inherent exposure of the underlying mortgages to prepayment risk. Since then, it has been extended to a wide range of securities and categories of risk. In this issue’s Innovations section, Stone and Zissu describe a new kind of securitization, in which the risk to be managed is the risk of death. Or the opposite, actually: It is “longevity risk,” the risk that an insured person will live too long, i.e., longer than their actuarial expected life span. A senior life settlement contract provides a way for a terminally ill, or very old, holder of a life insurance policy to liquidate it and obtain cash prior to death. The article describes how a portfolio of life settlement contracts may be securitized and tranched, and discusses pricing and risk management for the new securities.

Complexities of Life Insurance Policy Valuation

Amoia, Michael F.; Mendelsohn, Jon B.; Slane, Robert C. (2014) Estate Planning

A policy’s interpolated terminal reserve value may be relatively simple to calculate, but not necessarily a realistic measure of the policy’s true worth.
Abstract |Local file in Dropbox|

Life insurance is one such hard-to-value asset. Unfortunately, valuation rules for life insurance are out of date and too rigid to cover all situations. At a time when only yearly renewable term and whole life insurance products existed, a set of rules under the gift and estate regulations were developed to look at policy reserves as appropriate value. As with other assets, there is no one simple method to determine the value of a life insurance contract. An appropriate analysis must include the interpolated terminal reserve provided by the carrier, as well as an analysis of the value a willing buyer will pay for an item that a willing seller will sell, a review of the cash/account value, how long the contract will support itself without any further premiums, replacement value, and any other reasonable method that may be considered for other hard-to-value assets.

Life Settlement Funds: Current Valuation Practices and Areas for Improvement

Braun, Alexander; Affolter, Sarah; Schmeiser, Hato (2015) Risk Management and Insurance Review

A majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed.
Abstract |Local file in Dropbox|

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open-end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive-compatible fee schedules.

Accounting for the Purchase of Life Settlement Contracts

Reinstein, Alan; Miller, Cathleen L. (2007) CPA Journal

While measurement of fair values for life settlements is being developed, the provisions of FASB’s FSP FTB 85-4-1 should provide clearer guidance and increased transparency for accounting, and help accountants and financial planners better inform investors of the risks and rewards involved in such investments.
Abstract |Local file in Dropbox|

The article discusses the accounting for the purchase of life insurance policies. Purchasing life insurance policies from the elderly or terminally ill is becoming an increasingly popular investment tool. The Financial Accounting Standards Board (FASB) issued new authoritative guidance relevant to accountants, financial planners, investors, and insurance professionals. In March 2006, FASB issued Staff Position FTB 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.

welfare

Life Settlements from the Perspective of Institutional, Real Options, and Stewardship Theories

Dibrell, Clay (2010) Family Business Review

Institutional theory provides a broader perspective on the potential endemic risks associated with the life settlement industry, as it strives to attain legitimacy; real options theory helps predict the outcome of a succession event, which reduces the uncertainty associated with succession to external and internal life settlement stakeholders; stewardship theory suggests life settlements would be a significant financial vehicle, enabling the steward of the firm to maximize his or her utility through extrinsic and intrinsic rewards.
Abstract |Local file in Dropbox|

As families seek alternative forms of financial capital without putting the family business at risk, life settlements are gaining the interest of family businesses and scholars. This commentary draws upon institutional theory, real options theory, and stewardship theory to provide a foundation to better understand life settlements and to complement the work articulated by Adams.

The Impact of the Secondary Market on Life Insurers’ Surrender Profit

Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato (2009) Journal of Risk and Insurance

In the long run, both consumers and life insurance carriers will benefit from a competitive secondary market.
Abstract |Local file in Dropbox|

Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior–subject to the health status of an insured–in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.

The Life Settlement Market is an Opportunity

Bakos, Tom; Parankirinathan, Kiri (2006) Journal of Structured Finance

Insurers and reinsurers should participate in the life settlement market, through e.g. purchasing impaired policies as a hedge against the increased mortality risk, to drive an orderly and reasonable market development for the benefit of all involved including themselves.
Abstract |Local file in Dropbox|

Life settlements provide life insurance policy owners a viable alternative to surrendering the life policy. The authors address the misunderstandings of many early entrants regarding the inner workings of life insurance products, the terminology, and the applicability of certain actuarial assumptions. The authors point out that insurance companies, rather than portraying life settlement transactions as an attack on policyholder equity, ought to take more responsibility in creating a disciplined and orderly secondary market for life insurance policies that can benefit their policyholders. A mature life settlement market–with attention paid to consumer needs, a technically correct understanding of the risks, responsible pricing, and maintenance of high ethical standards–will thrive and every participant will be well served. Who is better equipped to do this than the insurance companies?

Regulating the Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Journal of Insurance Regulation

Under appropriate regulation, a competitive secondary market promises to become a valuable and permanent part of the life insurance industry, benefitting policyholders by allowing them to realize the economic value for the sale of impaired policies.
Abstract |Local file in Dropbox|

This article provides an in-depth examination of the secondary market for life insurance markets that has evolved over the last two decades: viatical and life settlement firms. In addition to explaining the economic rationale underlying the market, the authors address a number of regulatory issues, including the potential for fraudulent practices and the creation of more efficient markets for insurance products.

Consider Life Settlements As An Option For Divesting Life Policies

Arenson, Steven; Miller, Robert G. (2003) National Underwriter

A life settlement can be the means to a client’s financial planning end, delivering the highest economic value and the best solution for changing needs.
Abstract |Local file in Dropbox|

Provides tips in divesting life policies in the U.S. Partial-surrender of the policy; Practice of non-forfeiture provisions; Conversion of the policy into a gift.

New Value in Old Policies

Alexander, Neil (2011) Journal of Accountancy

Clients can recover significant wealth that may betrapped in unneeded life insurance.
Abstract |Local file in Dropbox|

Many clients have life insurance policies they view as unnecessary because they no longer meet their original need. As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. JE McGowan Consulting estimates the potential secondary market for life insurance policies exceeds $18 billion annually. Before clients abandon old policies, CPAs should step in and help them recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. CPAs can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket. Determining if selling a policy is a good idea is a relatively easy process for CPAs – and potentially lucrative for policyholders.

Does the Secondary Life Insurance Market Threaten Dynamic Insurance?

Daily, Glenn; Hendel, Igal; Lizzeri, Alessandro (2008) American Economic Review

Settlements may be welfare improving if need for insurance and health status are both correlated with income.
Abstract |Local file in Dropbox|

The article investigates the impact on dynamic life insurance of secondary life insurance markets. Secondary markets for life insurance arose in the 1980s to address the needs of terminally ill policyholders with AIDS. By 2007 settlements stemming from secondary insurance had grown to as much as $6.1 billion. The authors examine the consequences for policy and welfare of these settlements. They present an economic model and discuss the impact of settlements on the primary insurance market. Under certain circumstances, they note, settlements can enhance welfare.

An Investment to Die for: From Life Insurance to Death Bonds, the Evolution and Legality of the Life Settlement Industry

Bozanic, Kelly J. (2008) Penn State Law Review

An individual has the freedom to engage in the transaction that makes sense to him personally, and is not captive to any market – insurance company or life settlement.
Abstract |Local file in Dropbox|

Profiting from death may strike one as morally offensive, but the life settlement industry has created just such an opportunity. A life settlement is a transaction wherein an insured assigns the ownership interest (contract rights to the death benefit) of a life insurance policy to an investor for cash consideration. In other words, it is the sale of an economic interest in the death of the insured. As such, the industry has created a secondary market for what was once thought to be an illiquid asset: life insurance. While current market volatility makes an investment in death attractive, the life settlement industry is not without pitfalls. This Comment explores the evolution and legality of the industry as well as considerations for an individual contemplating a life settlement transaction.

Life Settlements: Know When to Hold and Know When to Fold

Leimberg, Stephan R.; Weinberg, Michael D.; Weinberg, Benjamin T.; Callahan, Caleb J. (2008) Journal of Financial Service Professionals

Advisors can use answers to questions about outside needs, emotions, attitudes, tolerances, and unique circumstances to provide a more refined analysis prior to curnching the numbers.
Abstract |Local file in Dropbox|

In the final analysis, a life settlement is a diversion of what often is the single most valuable financial asset a client’s family or business might receive at an insured’s death. It is therefore critical that all parties to the potential transaction follow a recognized set of “best practices” to ensure that a professional’s “green light” or suggestion to proceed with a life settlement is the appropriate choice. Best practices here dictate a formal, objective, and documented two-part decision-making process to answer the question, “Should my client retain currently owned insurance or should it be sold?”

Price Regulation in Secondary Insurance Markets

Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2004) Journal of Risk and Insurance

State regulation on the viatical settlement market induces welfare losses.
Abstract |Local file in Dropbox|

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Keeping a Policy

Jones, Lucretia DiSanto (2005) Advisor Today

A lot of estate value is destroyed through sale of a life insurance contract.
Abstract |Local file in Dropbox|

Reports that insurance and financial advisors in the United States have quantifiable data which illustrates that life settlements may not be an appropriate option for many clients in the United States Details of a life insurance settlement transaction; Assessment of life settlement transaction costs; Importance of estate planning.

Underwriting Reporting: A Common Ground For Insurers, Settlement Firms

Fasano, Michael V. (2006) National Underwriter

Life and life settlement industries have more to gain than to lose from each other.
Abstract |Local file in Dropbox|

The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate. A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity. The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other. Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together.

The Benefits of a Secondary Market for Life Insurance Policies

Doherty, Neil A.; Singer, Hal J. (2003) Real Property, Probate and Trust Journal

The secondary market of life insurance provides liquidity and enhances policy value, which benefits policyholders and feeds back to the primary market in an expansion of demand.
Abstract |Local file in Dropbox|

This Article analyzes the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. It begins by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, it outlines the economic theory of a life insurance market both before and after the introduction of a secondary market. Without an active secondary market, the equilibrium quantity of “impaired’’ policies surrendered is inefficiently low. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If no external market for reselling policies exists, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels because they wield monopsony power over the repurchase of impaired policies. Entry by firms in the secondary market erodes monopsony power. Finally, the Article examines the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market and discusses the future of life settlements. The magnitude of the benefits is correlated positively to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Bibliography View

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———. 2008b. “Fixed Income Securities with a Zero Macaulay Duration: Senior Life Settlements.” Applied Financial Economics Letters 4 (3). Routledge: 205–7. doi:10.1080/17446540701604291.

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———. 2008. “Evolution of the Life Settlement Industry: A Provider’s Reflection on Trends and Developments.” The Journal of Structured Finance 14 (2). Institutional Investor Journals: 55–58. doi:10.3905/jsf.2008.709957.

———. 2009. “A Provider’s Reflection from Inside the Life Settlement Industry: Understanding the Chaotic Environment.” The Journal of Structured Finance 15 (2): 70–73. doi:10.3905/JSF.2009.15.2.070.

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———. 2008. “Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts.” The Journal of Alternative Investments 11 (2). Institutional Investor Journals: 94–108. doi:10.3905/jai.2008.712600.

———. 2009. “Delta Hedging IO Securities Backed by Senior Life Settlements.” The Journal of Structured Finance 15 (2): 93–100. doi:10.3905/JSF.2009.15.2.093.

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———. 2012. “The Effect of Probabilistic and Stochastic Valuations versus a Deterministic Valuation of Securitized Senior Life Settlements on the Level of Liquidity Facility.” The Journal of Structured Finance 18 (1): 137–43. doi:10.3905/jsf.2012.18.1.137.

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1. Java is a PhD candidate from the University of St. Gallen (supervisor: Prof. Dr. Alexander Braun), and is currently conducting research at Harvard University (supervisor: Prof. Dr. Lauren H. Cohen) as a visiting fellow.↩

2. Access to this shared Dropbox folder is publicly unavailable at the moment.↩