History of Life Settlements
Life settlements represent the rapidly developing investment strategy that acquires U.S. issued insurance policies in the secondary market for life insurance. The genesis of the strategy came out of the AIDS epidemic of the 1980s and at the turn of the century, life settlements on the elderly first occurred.
Many of the initial investors in the asset class were German closed-end funds who benefited from an anomaly in German tax law that imposed no tax on death benefits. Wall Street quickly saw the potential for the securitization of portfolios of policies and a number of major firms established a life settlements initiative. Once insurance agents realized a secondary market for policies existed, they developed financing strategies to drive the sale of new insurance to seniors. The ‘manufacturing age’ was brought to an end by state regulation and stricter underwriting standards of experienced investors.
Clearly challenged in its early years, actuarial underwriting in the life settlements market has evolved over the past fifteen years with the industry’s recognized life expectancy evaluators benefiting from past experience and the growing wealth of actuarial data. Seniors are gaining awareness of life settlements as an alternative to lapsing or surrendering their policies and many of the top insurance distribution networks that sell policies are recognizing their fiduciary responsibility to advise their elderly clients of the potential option to settle their policies. Today’s market has evolved to a stage where direct to consumer marketing has taken hold and is raising the awareness of the settlement option.
The market is still evolving as an investment class and will continue to grow as consumer demand to sell their policies expands and investors grasp the unique, non-correlated qualities of the investment.