Published October 2017


Investing in Life Settlements

There are plenty of reasons to invest in life settlements. This alternative investment has developed due to a unique necessity and has caused a positive impact for both institutional investors and the insured individual.


The prolonged low interest rate environment is forcing investors to embark on paths away from traditional assets as they seek reasonable return. For the insured, selling their life insurance policy to a third party is one of the solutions to fund retirement. Hence, we have a win-win outcome.


What are life settlements? A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit.  “On average, policy sellers receive anywhere from four to seven times the amount of the policy’s current cash surrender value” 1


Why should institutional investors consider the life settlements asset class? The reasons to investment in Life Settlements will be discussed here:


1. What are the expected returns?

Investment in US life policies offers the opportunity for very attractive US$ denominated returns once you appreciate its strengths and limitations.


GIAM’s preferred strategy is to buy and to hold to maturity, physical life policies that meet certain strict criteria and that have passed rigorous due diligence. Synthetic variants of longevity investments miss many value opportunities presented by physical policies and are opaque as to fees and assumptions.


The return profile and behaviour of a portfolio of life settlement policies is completely different to traditional investments. At the lowest risk entry point, to the asset class, offers “rule of thumb” returns of 500-600 bps over the equivalent tenor US treasury rate. A carefully considered walk up the risk profile path could potentially add 50-100% to this return target. This is even more attractive when you consider that the underlying credit risk of these instruments is very low.


The risk premium essentially falls into two categories:

  • Uncertainty of tenor, and consequential uncertainty of the sequence of returns
  • Limited liquidity.


It is interesting to note however, that it is precisely this aspect of limited liquidity that shields this asset from taking on the correlations of listed and other rapid transactional markets. If you are comfortable with these aspects the asset class is worth considering.


So when will I see returns you ask? The short answer is that normally the bulk of returns would be expected in the second and third quartiles of the average mortality curve of the pool of insured lives. However, a number of factors can skew this outcome particularly if there is a big variation in policy size within the portfolio or if the portfolio is small.


It is normally unusual to see significant maturities in the first few years of a newly originated portfolio. The certainty for many newly established portfolios is an initial long period of small negative return, as a result of continued premium payments and initial purchase of policies.  Investors in smaller portfolios, say less than 2000 lives, should also expect lumpy returns simply for the reasons of probability and chance in small samples.  An initial negative return profile similarly observed in investments like infrastructure or a “Land Bank”.


In fact, it has often been shown to be a “Red Flag” for smaller funds when published returns indicate regular and invariable positive returns from the very outset of a fund’s establishment.


This investment is rewarding to those who show patience, dedicated capital, and the openness to recognise asset managers who take a conservative approach to stable ongoing returns.


2. What is the Risk Reward Profile?

Although the market is considered low risk an investor can unwittingly make high risk decisions, at a policy level, that can impact their returns. For example, an investor may purchase a tertiary portfolio for far less than the original purchase price with the expectation of above average returns. However, this portfolio may exhibit poor mortality experience. This may be due to poorly executed buying decisions and due diligence or flawed life expectancy estimates when it was originally constructed. (If something is cheap there may well be a good reason for that).


As the popularity of the asset grows some investors are demanding a quick return profile with a high level of liquidity. This is typical with the marketing of retail investment schemes. However, this asset requires a patient investor with the ability and will to hold to maturity. Investors should commit to at least 8 to 10-year horizon in order to realise respectable gross risk adjusted return.


As mentioned earlier, insurance based instruments perform to in a manner totally unrelated to traditional investments.


The returns both predicted and realised, are driven by the probability and then the eventual timing of the insured risk occurring.  In the case of secondary life insurance contracts, the returns will normally occur along a predicted mortality curve based on a set of data of historical experience. This data is accumulated and refreshed regularly by underwriters and is derived from data from thousands of similar cases. Contained within this resulting data will be a point that the industry calls “life expectancy” but in reality, is only the median point (the 50th Percentile). However,  what the graph clearly shows is a period of time (which may be several years) where the event is statistically “most likely”. This is still not a guarantee.


Here below is a sample curve from one case. Obviously, a portfolio will be made up of many cases (the more the better) and the average shape of the portfolio’s curve will be driven by many factors. These include (to name a few) the variability of case size, the variability in insured characteristics, the variability of median predicted tenor. The actual insured event will occur randomly along the line in a manner idiosyncratic to that case.



A portfolio is constructed, valued and returns are forecast using the predicted mortality data. In a portfolio, the narrower the band of projected returns, the more certainty there is that those events will occur in that time frame. Conversely, a portfolio with a wide predicted mortality spread would be expected to have more volatility of returns. To mitigate against volatility in returns, the investor needs to be aware that as the size of a portfolio (the number of cases) increases so does the confidence in the statistical predictions.


Buying the best fit policy types is particularly crucial from a risk management standpoint. The ability to purchase a large pool of appropriately diversified lives will hinge directly on the amount of invested capital and the number of lives in the portfolio. The smaller the portfolio the more difficult it is for the investment to closely follow actuarial predictions. Small portfolios exhibit lumpy returns.  There is a strong requirement for careful portfolio construction and to be resolute in your asset selection criteria and implementation.


Constructing a portfolio of life settlements assets is both an art and a science.  In fact, every new life policy, you pick up to analyse, will potentially have features and data idiosyncratic to that case alone even when potentially comparing different policies on the same insured life and issued by the same insurance company.  A skilled asset manager can look through masses of data and policy contract information in an effort to recognise and optimise crucial features to the investors benefit.


3. What is the Market Outlook?

Most market players agree that the life settlement market, at present, is now a buyer’s market. Demographic factors and the growing awareness of the life settlements option, among baby boomers, has seen a steady and supply continues to increase. Currently, investors are more focused entering the tertiary market and buying distressed portfolios, and new capital in the secondary market remains scarce. However, investors are likely to move back toward the secondary market as tertiary market supply diminishes.


What do the experts say about supply?

  • Although the secondary market has slowed the potential to grow is still there. Life Insurance Settlement Association (LISA) states that, “there are 38 million life insurance policies owned by American seniors over the age of 65, which have a collective face value of more than $3 trillion ”2
  • The number of retirees in the US market continues to increase. As per the U.S Census Bureau, “residents age 65 and over grew from 35.0 million in 2000, to 49.2 million in 2016, accounting for 12.4 percent and 15.2 percent of the total population, respectively”. 3
  • According to the Merrill Lynch Finances in Retirement Survey, released in March 2017, the USA retirement population will increase by 10,000 new retirees a day, and that managing of retirement income will increasingly rely on the individual person. 4 (Merrill Lynch pp.6) The primary financial concern for retirement is the costs associated with health care.4 (Merrill Lynch pp.12). “Increasing life expectancy, coupled with the aging of the large Baby Boomer generation, will potentially give rise to growing numbers of older adults confronting chronic diseases, such as arthritis, hypertension, heart disease, stroke, diabetes, cancer, and Alzheimer’s.”4 (Merrill Lynch pp.15)
  • In their latest research, Conning Inc, reported that the market size for USA life insurance policies was USD$29 billion and it, “forecast that an annual volume of new life settlements will average approximately 1.8 billion per year”. 5


The supply of secondary life insurance policy is going to continue to increase as the baby boomers enter retirement. The potential for growth of the market simply comes down to necessity of funding retirement and managing health.


Life Settlements Awareness


“Each year, more than $140 billion worth of life insurance owned by Americans over the age of 65 is lapsed or surrendered back to the insurance companies that sold the policies – mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold.”6 However, the awareness of life settlements is on the rise. LISA is dedicated in encouraging those in the position of providing financial advice to discuss the option of life settlements with seniors.


Recently, the National Association of Insurance Commissioners (NAIC) has endorsed life settlements as one of many financial mechanisms for funding long-term care (LTC).7 This is a monumental movement in LISA’s awareness campaign for life settlements.


4.  How is the market regulated?

In the United States, insurance is regulated at State level, although State regulators have a national body known as the National Association of Insurance Commissioners (NAIC).


The regulatory framework, which protects both the policy holder and the investor, is robust and continuing to strengthen. Not only does this provide protection but it also enhances market transparency and reputation. The regulation of the life insurance secondary market now exists in 42 states and the territory of Puerto Rico.  This offers approximately 90% of the United States population protection under comprehensive life settlement laws and regulations. 8


A growing number of American states include Life Settlements under their definition of securities, while many states have adopted the consumer protection approach, or both. Some states have used existing insurance regulations to control potential fraud.


Recently, the state of Florida released a state legislation, HB 1077, to help combat insurer fraud in the state. Specifically, the law encourages full disclosure by the life insurer to inform the insured to consult a licensed insurance or financial advisor on their options before making any changes to their policy.9 Consumers will now be in the position to make better judgements on their policy as they will be informed of a full range of options. The state of Florida is the leader in legislation that impacts seniors in America and there is hope that other states will follow.


If an investor is looking at investing in the asset class they should also consider partnering with life settlements fund manager which demonstrates a significant amount of experience in the industry and knowledge of the regulatory landscape.

5. What are the volatility risks?

The current investment market is consumed by historical volatility of the equity and real estate markets in particular, but also the well-publicised failures in both fixed interest and derivative based hedge funds. Coupled with this is historically low interest rates and instability in the stock market. This suggests that investors more than ever need to consider diversification into non-traditional asset classes.


This asset class has real diversification qualities compared to traditional investments. Investment performance is primarily derived from the mortality of the insured. It is reasonable to accept that someone’s death does not link to the rise and fall of the financial markets. Mortality is therefore, deemed a minimally correlated risk.  Consequently, the asset has a low correlation to equity, property, bond markets and other alternative assets.


The intrinsic characteristics of Insurance Securities such as Life Settlements, being non-identical, non-market traded physical securities means that they are by nature significantly less volatile than say listed securities.


Investing in the life settlements asset provides genuine and unique value to institutional investors seeing a high diversification with low volatility.


6. What are the asset quality features?

One of the key features, you should consider, is that the asset offers a known future cash flow. This future projected cash flow is from a contracted benefit that is not at the risk of the markets.


It is not a matter of IF an investor will receive a return but simply WHEN. Provided, that the asset has been serviced appropriately the only uncertainty would be in the timing of the final cash flow.


Like any investment, you want to be sure you get paid in due course. This asset exhibits outstanding credit quality. Not only does the U.S. life insurance industry exhibit an unblemished record with respect to payment of valid death benefit claims. This risk is hedged through purchasing policies issued by a spread of the most financially strong insurance companies. US life policies boast underlying credit quality higher than most bank issued bonds. Death benefits are paid out of legally distinct statutory reserves that are closely regulated. This was proven when claims were still paid even during the depths of the global financial crisis.





This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.



  1. 1. Life Insurance Settlement Association, 2017, Consumer Advisors, Benefits for You, accessed 28th July 2017, <>
  2. Life Insurance Settlement Association, 2017, Consumer Advisors, Why Sell, accessed 28th July 2017, <>
  3. United States Census Bureau, (22 June 2017) The Nation’s Older Population Is Still Growing, Census Bureau Reports, Release Number: CB17-100, Media Release, accessed 28th July 2017, <>
  4. Merrill Lynch Wealth Management, March 2017, Finances in Retirement: New Challenges, New Solutions A Merrill Lynch Retirement Study, conducted in partnership with Age Wave, accessed 28th July 2017, <>
  5. Conning Inc, 2016, ‘Life Settlements, Secondary Annuities, and Structured Settlements: Rate Increases Squeeze Returns’, pp. 11
  6. Costa. W, 29th June 2017, CFP Board Proposal to extend fiduciary duty could improve awareness of life settlements, Life Insurance Settlement Association, blog, accessed 28th July 2017, <>
  7. Life Insurance Settlement Association, 26th July 2017, Life Settlements Endorsed by NAIC Innovation Group as Private Market Option for Financing Long-Term Care Services, accessed 28th July 2017, <>
  8. Life Insurance Settlement Association, 2017, Life Settlements Regulation, accessed 28th July 2017, <>
  9. Bayston.D, 27th June 2017, Florida Legislation is Good News for Seniors Who Want to Make Changes to Life Insurance Policies, Life Insurance Settlement Association, blog, accessed 28th July 2017,. <>