Investors / Risk takers

Investors / Risk takers

Life settlement investors are known as financing entities because they are providing the capital or financing for life settlement transactions (the purchase of a life insurance policy). Life settlement investors may use their own capital to purchase the policies or may raise the capital from a wide range of investors through a variety of structures. The life settlement provider is the entity that enters into the transaction with the policyowner and pays the policyowner when the life settlement transaction closes. In most cases, the life settlement provider has a written agreement with the life settlement investor to provide the life settlement provider with the funds needed to acquire the policy. In this scenario, the life settlement investor is effectively the ultimate funder of the secondary market transaction. However, in some life settlement transactions, the life settlement provider is also the investor; the provider uses its own capital to purchase the policy for its own portfolio.

Life settlement investments are not typically suitable for individual investors. Risks are associated with life settlement investments that individual investors may not recognize and that unscrupulous promoters may misrepresent or fail to disclose. For example, funds invested in life settlement investments are usually not accessible on the demand of the investor, as are investments in many other types of securities, such as mutual funds. These factors and others render this type of investment unsuitable for the financial needs and interests of the average individual investor. For this reason, the norm today, especially among reputable life settlement providers, is to obtain capital only from life settlement investors who are established and credible institutional sources of capital rather than individual sources of capital.

In most cases, a life settlement investor must be a qualified institutional buyer as defined in the federal Securities Act of 1933. A qualified institutional buyer (QIB) is defined under Regulation D, Rule 144A as an entity owning and investing large amounts of securities, with the threshold ranging from $10 million to $100 million of securities not affiliated with the entity and dependent on the type of entity. QIBs are eligible to participate in a restricted investment market known as the "Rule 144A market" that is not available to the public because the issuer of the securities has chosen not to make the required public disclosures or to register the securities. The purpose of the qualified institutional buyer requirement in life settlements is to prevent unsophisticated or undercapitalized investors from participating in—and potentially being harmed by—complicated life settlement transactions.

Financial institutions meet the qualified institutional buyer test and are therefore suitable life settlement purchasers. In addition, institutions have teams of experienced investment analysts and are experts at managing investment risk; they can impose a “corporate governance” discipline on the life settlement transaction process intended to minimize questionable market practices; and institutional funding provides a high degree of consumer protection with regard to privacy and confidentiality (a policyowner’s or insured’s personal information should never be in the hands of an individual investor.)

Other Involved Parties

Underwriters/Life Expectancy Providers - Provide life expectancy estimates on the insured for pricing purposes. There are four major life expectancy providers, namely 21st Services, AVS, Fasano, and ISC Services.

Some underwriters provide unreasonably short life expectancies by using base tables that are 5 years out of date, ignoring future mortality improvements & current treatments Eg Statins and basing life expectancies on life manuals which are conservative for mortality and not longevity risk. Others apply actuarial analysis to the most recent available data as well as their own experience to develop their base tables and underwriting manuals.

Providers who do not provide short life expectancies are shunned by originators whom are primarily remunerated for volume. Providing more reasonable life expectancies does not inflate the apparent value in these insurance policies. This results in fewer cases being written and less support from originators.

There are no experience studies publically available which support the accuracy of any of the major life settlements underwriters.

Steps in a Transaction

1. Policyowner consults with an advisor, decides to sell his or her policy.
2. Policy owner and advisor decide whether to work with broker or to go directly to providers.
3. Client & advisor submit policy for valuation. Client releases medical information.
4. If policy meets criteria for a life settlement, providers send offers directly or through a broker.
5. Client and advisor review offers and client accepts his preferred offer.
6. Client and advisor complete the provider's closing package, and return essential documents.
7. Provider places cash payment in escrow and submits change of ownership forms to the insurance carrier.
8. Paperwork is verified and funds are transferred to the policy seller.