NPR ran two segments on life settlements last month. Planet Money’s “You bet your life insurance” aired August 14, and Morning Edition followed on August 21 with “Life settlements let people cash in on their own life insurance.”
Planet Money opened by noting that “some of the biggest firms on Wall Street are waiting for thousands of strangers to die,” and NPR’s summary of the second segment called our industry “a robust and morbid financial market.” Planet Money’s long episode is fair, and in places it makes a strong case for life settlements. The shorter Morning Edition version also gets things right but leaves out key considerations.
Here’s a closer look at where the segments were correct, what needs further clarification and why life settlements deserve a spot in your portfolio.
What NPR Got Right About Life Settlements
Morning Edition cited a range of 20 to 40 cents on the dollar, which matches what the market pays sellers. LISA puts the broader range at 10% to 50% of face value, with about 20% typical. The insured’s health, actuarial estimates and ongoing policy costs help determine the final sale price.
The legal footing for selling a policy is also correct. Under Grigsby v. Russell, a 1911 Supreme Court decision, a life insurance policy is personal property and its owner can sell it like any other asset.
The origins of life settlements as presented by NPR also hold up. The industry started in the 1980s with AIDS patients who needed cash before they passed on. Scott Page arranged the first of those deals in Cleveland to keep his dying partner’s policy in force and pay medical expenses. By the late 1990s, he had brokered more than 3,000 viatical settlements, a business that later evolved into the life settlement industry.
Are Life Settlements a Morbid Investment?
NPR’s use of the term morbid to describe the life settlement industry is understandable because death is an inherent part of it. However, as we discuss in Fact vs. Fiction: What Investors Should Know About Life Settlements, it’s also a part of the life insurance industry. Yet most people see buying a policy for themselves as a responsible, caring act.
We also discuss the morality of life settlements in Are Life Settlements Ethical? Reframing Common Investor Objections, concluding that life settlements are often the most ethical option for seniors who no longer want their policy.
Who Sells a Life Insurance Policy, and What Are the Alternatives?
Frank Sierawski, the cancer survivor whose story was relayed in the NPR segments, accepted 31 cents on the dollar for his policy but still made 20 times more his money. The segment measured his 31 cents against the full death benefit, a number he would never see himself because the death benefit goes to a beneficiary after the insured dies.
Life settlements are more common among seniors who want to sell their policy. Many can no longer afford the premiums on their limited retirement income or want to unlock some of the policy’s value while living.
Universal life policies, for instance, can eventually have premiums of tens of thousands of dollars a year. If a senior stops paying and the policy lapses, coverage ends and decades of premiums return nothing. The insurer keeps every dollar.
If they surrender the policy instead, the carrier pays only the cash surrender value, typically a fraction of the death benefit. But if they sold their policy in a life settlement, they may get four to seven times more than the surrender value.
Compared with those options, an offer of 20 to 40 cents on the dollar likely gives the seller the most money. In every other outcome, the money stays with the insurance company, which makes the insurer and its surrender check the only real competition for a life settlement offer.
Where Do Life Settlements Fit in a Portfolio?
Both NPR segments described the market from the insured’s side, so here’s what it looks like from the investor’s side.
Life settlements are a licensed industry regulated by 43 states and Puerto Rico. Most states license brokers and providers and require state-approved contracts and disclosures, according to the Life Insurance Settlement Association.
Life settlements are also non-correlated assets, so they aren’t directly affected by the ups and downs of the stock and bond market and can help smooth out your portfolio’s returns. Generally, your return is the death benefit at maturity minus what you paid for the policy initially and over time. Annual returns average 11% to 13%, but can be 800% or more when a policy matures much earlier than estimated.
The main risk with a life settlement is the insured outliving a life expectancy estimate. Holding a spread of policies reduces this risk because no single maturity date disproportionately weighs on your returns. Receiving the death benefit payout also depends on the carrier paying the claim, so the insurer’s financial strength rating belongs in your review of any policy.
Life Settlements: A Mature Market Worth Exploring
Greg, Page’s partner, died in 1993, and his $100,000 policy paid out. Page repaid the stranger who had covered the policy’s premiums and Greg’s hospice care. From there, Page built a business so other dying men could get the same deal.
The viatical settlements industry eventually branched into the life settlement industry. Still, the exchange has stayed the same: cash now for a policy the seller would otherwise let lapse or surrender for a fraction of its value.
Today, the life settlement industry is a robust and growing market that’s regulated in most states and uses advanced actuarial modeling to help investors make informed decisions.
If you’d like to talk through how a policy is priced, or what a spread of policies could look like in your portfolio, contact i2 Advisors for a complimentary consultation.