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.

1911

Grigsby v. Russell: The U.S. Supreme Court ruled that life insurance policies are an asset. Like all assets, life insurance policies are now freely assignable for value.

1980s

The AIDS epidemic left many terminally ill patients in need of money for treatment. The secondary market for these life insurance policies, known as viatical settlements, helped thousands of patients by purchasing their life insurance policies and providing them with much needed cash.

1993

The National Association of Insurance Commissioners’ (“NAIC”) Living Benefits Model Act was adopted. This Act was the precursor to today’s life settlements acts.

1994

The Viatical Association of America (VAA) was founded as a non‐profit trade group for the viatical industry.

Late-1990s

Seniors in the U.S. discovered a new option to sell unneeded or unwanted life insurance policies. In need of better alternatives, consumers over the age of 65 can now sell their unneeded life insurance policies in the secondary market as an alternative to lapsing or cash surrender.

2000

The National Conference of Insurance Legislators (NCOIL) adopted the Life Settlements Model Act. The VAA changed its name to the Viatical and Life Settlement Association of America (VLSAA).

2001

The purchase of life insurance policies from senior citizens became widely known as “life settlements”. The NAIC Model Act was amended extensively for the second time and new sections were added to address fraud, advertising, and civil remedies. Revisions included the addition of “life settlement” in the definition of a viatical settlement and the strengthening of disclosures. Optional provisions were added to address the investor side of the viatical transaction.

2005

The life settlement option had quickly grown to an estimated $5 billion (face value) industry. Life settlements were regulated in 25 states and provided seniors significantly more value than the cash surrender option. Many policy owners were still unfamiliar with the option to sell their policies. The Board of the Viatical and Life Settlement Association of America voted to change the name to the Life Insurance Settlement Association (LISA).

2006

New surveys were conducted that documented significant opportunity to increase financial market awareness of the life settlement option. The March 2006 issue of Agent’s Sales Journal reported that 6 in 10 agents didn’t feel that they knew enough about life settlements, but that 71% of them believed that life settlements could benefit their clients as a financial planning tool. These types of findings sparked a proactive effort by the industry to raise the visibility of life settlements, including the first-ever Life Settlement Awareness Month held in June 2006 in order to promote greater awareness of the industry.

2007

Thirty‐five states had adopted the original NAIC Model Act. In June 2007, the NAIC passed a revision to the Act that addressed the burgeoning life settlement market. The revised Act strengthened consumer protections and addressed concerns about "stranger‐originated life insurance" (STOLI) by imposing a five‐year ban on settling life insurance policies. STOLI transactions involve the purchase of life insurance policies for the sole purpose of selling them immediately.

In November 2007, NCOIL adopted a revision of its Life Settlements Model Act that defined STOLI and banned its practice, then outlined recommended provider and broker licensing and disclosures to policyholders.

In December 2007, the U.S. Supreme Court declined to hear a case that challenged a state's right to regulate life settlements. The decision in SEC v. Life Partners effectively meant that the regulation of the insurance industry and the life settlement industry would remain in each state and not shift to federal oversight.

2008

At an estimated $12 billion (face value), the industry continued to grow at a rapid pace, while sophisticated companies and institutional investors entered the marketplace. More and more states regulated life settlements, while consumer awareness remained limited. In November 2008, NCOIL reported that lawmakers in the following states introduced legislation regulating and restricting life settlements and STOLI: Arizona, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Maine, Nebraska, Ohio, Oklahoma and West Virginia.

2009

A decrease in investor capital reduced the ability of life settlement funds to purchase new policies. Policyholders settled approximately $8 billion worth of U.S life insurance. A study conducted by Golden Gateway Financial, Inc. and the Insurances Studies Institute found that “80% of seniors owned some form of life insurance policy, but nearly half are unaware it can be sold for cash now.” The financial crisis brought into focus the need for seniors to find liquidity to augment retirement funding.

2010

The SEC and the GAO issued reports on the life settlement industry. Conning Research & Consulting estimated that life settlement sales decreased for the third consecutive year in 2010. Capital sources continued to remain skittish about returning to this asset class and investors were focused on acquiring distressed portfolios rather than purchasing new policies. Policyholders settled approximately $3.8 billion worth of U.S. life insurance.

In November 2010, the National Conference of Insurance Legislators (NCOIL) adopted its Life Insurance Consumers Disclosure Model Act. This Act mandated that insurers provide written notice to policy owners - if an insured is 60 years or older or is known by the insurer to be terminally or chronically ill, if a policy owner requests to surrender the policy, requests an accelerated death benefit under the policy, or when an insurer sends notice to the owner that the policy may lapse - that there are options to lapse or surrender available to them. The NCOIL notice contains eight alternatives, one being “the sale of the policy pursuant to a life settlement contract.”

2011

As the industry matured, capital markets renewed their interest in life settlements. The market saw a resurgence as investor interest returned and recognized the market as a transparent and highly regulated industry. The need for policies was fueled by efforts at NCOIL to alert consumers of their options and alternatives to the lapse or surrender of their life insurance policies, as well as awareness by LISA to educate consumers on their options and the market in general.

2012

Life settlement sales increased in 2012 as compared to the prior year, but in general, the asset class continued to struggle to attract new capital. According to Conning & Co., investors purchased approximately $2 billion (face value) worth of U.S. life insurance policies in 2012.

2013

The life settlements industry showed significant signs of the turnaround in 2013. Berkshire Hathaway, the publicly owned invest company founded by Warren Buffett, returned to the asset class for the first time since 2006 by purchasing a portfolio of $300 million (face value) in life insurance policies. Meanwhile, a report from the AAP Life Settlement Market Update indicated that internal rates of return for life settlement transactions conducted in 2013 were in the high-teens, an attractive return at a time when fixed income and other hedge positions were delivering minimal rates of return. According to The Deal Pipeline, total life settlement transactions grew to $2.57 billion (face value) in 2013.

2014

Life settlements continued to show signs of steady recovery from the downturn of 2009-2010. Transaction volumes were reported higher by market participants in all major segments of the industry and Conning & Co. forecasted an average annual gross market potential for life settlements of $180 billion from 2014-2023, with an average volume of approximately $3 billion per year in life settlement transactions.

LEARN ABOUT OUR INVESTMENT STRATEGIES

Let us show you the small market

LET'S TALK