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About Life Settlements

Life Settlements constitute one of the most interesting and exciting asset classes to emerge in recent years. They have the potential to deliver steady, positive returns no matter what is happening in the financial markets – an attractive proposition after the losses that many fixed income investors have recently suffered – and have garnered the attention of investors the world over. This includes some of the biggest banks, pension funds and institutions in the investment industry.

So, what are they? As a strict definition, Life Settlements are:

United States-issued, life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime. The transaction by which an existing life insurance policy is sold to third parties is known as a Life Settlement.

A “whole of life” policy is one that pays out only upon the death of the life assured. Until that time, premiums must continue to be paid. Holders of such policies take them out for several reasons, but usually to provide for dependents in the event of their passing. Equally, holders often no longer have any reason to keep the policies after a period of time as they may outlive their usefulness or just become too expensive to continue.

Life Settlements redefine the traditional narrative of life insurance, presenting an innovative concept where policies become transferable assets, appealing to those seeking alternatives to traditional cash-in options

Many holders like to cash in their policies, perhaps to pay for healthcare or because they do not wish to keep paying the premiums. However, insurance companies often give little or no cash-in value for returned policies. Holders can usually get a much better deal by selling their policies in the life settlement market. In return for a market price, the new owners become the beneficiaries and continue to pay the premiums until the policies mature.

The concept of a secondary market for life insurance is far from new and dates back to the early part of the 20th century. The case of Grigsby v Russell eventually reached the US Supreme Court in 1911 where it was established that a life insurance policy was considered to be an asset that the policy owner may sell for a cash sum. Since then, regulation has continued to improve to protect the best interests of both buyer and seller.

The market for Life Settlements really started to gain moment in as a result of the AIDS pandemic in the 1980s. A large number of people needed cash to pay for their care and a substantial market developed to meet those needs. Life Settlements sold on lives assured that have been designated as having a terminal illness or to be in terminal decline, with a perceived life expectancy of less than three years, are known as Viatical Settlements and these were the main type of policies traded during the evolution of the market.

Many of the AIDS-related policies proved to be a bad investment as life expectancy estimates were notoriously unreliable, due to the advent of new drugs that extended life expectancy. ‘Viaticals’ are still perceived as risky investments and the market has now gravitated towards senior life policies (over-65s), where life expectancy opinions are much more accurate.

The Life Settlements market has grown substantially since the early 1990s but there is still potential for much more growth. As life expectancy in the US rises over time, the chances are higher that people will outlive the usefulness of their life policies. Increased awareness of the Life Settlements market is also likely to increase as more people realise, they can get a better price for their policies on this market versus what they would receive by surrendering them back to the insurance companies.

Investors, including managers of funds such as Managing Partners Group, can buy portfolios of these policies, estimating the life expectancies of the policyholders using population mortality statistics and evidence of the assured’s health to gauge how much they should pay for policies in order to achieve a steady return.

Prudent actuarial analysis and diversification are key requirements when investing in Life Settlements. If life expectancies are underestimated then this could impact returns, while a large number policies need to be purchased in order to spread the risk of such inaccuracies occurring. However, when portfolios of policies are handled correctly, they can be used to deliver steady, incremental returns in all market conditions – this is because life expectancies do not change, irrespective of what is happening to equities, bonds, or commodities etc.

Potential Size of the Life Settlement Market
Graph shows how Suneet Kamath, writing in the Bernstein Research Call in March 2005, estimated the Life Settlements market could grow from $13bn in 2005 to $161bn by 2030. His calculation was based on a rise in the US population aged over 65 to 72m by 2030. Kamath calculated that around 3% of all policies owned by the over-65s had been surrendered. This ‘penetration rate’ would imply an increase in market size of $12bn just because of the increase in the over-65s population. However, Kamath estimated that the surrender rate could reach 20%. This could add another $137bn to the Life Settlements market, which would rise to $161bn by 2030.

Internal Rate of Return
Growth Since Launch
Return Over the Past Twelve Months
(Net of Charges)

Life Settlements currently trade at a price that delivers an IRR (or annualised yield) of 12%. This quality of delivering steady returns, year in, year out at such a significant rate above the risk-free rate, makes Life Settlements a highly attractive asset class to investors. For example, the USD Growth Share Class of MPG’s High Protection Fund delivered a return of 219.72% net of fees from its launch date on 1st July 2009 to 31st December 2023, and in 2023 it delivered 9.31% net of all fees. This return was achieved over a period that included some of the most challenging financial conditions in history.

However, investing in Life Settlements s is a complicated process. Apart from the actuarial analysis, managers of funds that invest in them must also deal with risks associated with cash flow (liquidity), counterparty and currency risks. It is important for investors to understand what they are investing in so Life Settlement funds are only suitable for sophisticated investors who use them as part of a balanced, diversified portfolio.

History of Life Settlements

The first Life Settlement transaction can be traced back to the early part of the 20th century when a surgeon in the United States agreed to buy a life insurance policy belonging to one of his patients. John C. Burchard was in need of funds to pay for his surgery and offered to sell his insurance policy to Dr. Grigsby in exchange for $100 and an agreement to pay all remaining premiums. Following Burchard's death a year later, the executor of his estate, R.L. Russel, challenged the transaction and Grigsby's claim to the benefits of the policy in court.

The case of Grigsby v Russell eventually reached the US Supreme Court in 1911 where it was established that a life insurance policy was considered to be an asset that the policy owner may transfer without limitation. In the landmark ruling, Justice Oliver Wendell Holmes noted that "life insurance has become in our days one of the best recognised forms of investment and self-compelled saving". As a result of this decision a policy could be transferred into the name of another person and a number of specific legal rights became attached to it. These included among others the ability to use the policy as collateral for a loan, change the name of the beneficiary and sell the policy to another party.

This fundamental principle would subsequently allow the viatical and life settlement industries to emerge, however this did not happen until eighty years later when the onset of the AIDS epidemic sparked a flurry of transactions because of the inherent short life expectancies that were faced by the victims of the disease. As advances in medicine took place and people with AIDS started to live longer, viatical settlements became less profitable and an industry trading in life settlements policies arose. More recent US Court decisions have further reinforced the rights of an insured party to appoint a beneficiary and transfer the policy any time after it has been issued, regardless of whether the new policy owner has an insurable interest or not.

Since 1911 the Life Settlements market has continued to evolve and improve. Nowadays policies are traded in a highly regulated and transparent way, benefiting both the buyer and the seller of a policy. The market is now dominated by institutional investors and increased sophistication has allowed for a number of financial tools and instruments to become available enabling asset managers to deliver investment vehicles that can achieve extremely smooth, predictable investment returns.