The Mortality Linked Investment Contracts, once, regarded as one of the most unrecognizable and underestimated investment assets, has become a valuable part of a professionally assembled investment portfolio managed by the most sophisticated individual and institutional investors.
Life Settlements as an asset class has emerged considerably into a more transparent, and highly regulated industry that provides reasonable accessibility and benefits to investors.
In this article, LifeXcel will highlight five key factors that have immensely contributed to the growth of the life settlement industry.
Life Settlement companies mainly focus on the life insurance policies which are obtained from the insureds that are over the age of 65 years young, which represent nearly 20% of the US population. With 10,000 people turn 65 years daily, the amount of life settlement transactions is expected to increase as well. Furthermore, projections indicate that one in five Americans will be over age 65 by 2030, and one in four will be in that demographic by 2060. Taking this into consideration, aging “Baby Boomers” will be one of the key factors that affect this industry’s metrics.
Now, more senior insureds are entering the retirement phase, and due to various reasons such as urgent cash relief, sustaining lifestyle changes, to afford rising medical costs, etc. they might consider selling their no longer needed or unaffordable life insurance policy, in exchange for an immediate lump- sum cash payment that is generally greater than the policy’s cash surrender value. Thus, these circumstances alone may lead to more transactions in the life insurance secondary market and an increase of capital in the tertiary market.
Another important factor that worth mentioning is the conscientious efforts made by life settlement industry leaders such as the Life Insurance Settlement Association (“LISA”) and Institutional Longevity Markets Association (“ILMA”) with the mission to streamline and improve the tradeability, standardization, and transparent regulatory oversight of the market.
In addition, there are more and more states providing clear guidance and issuing regulations. In 2020, New Jersey was the latest state to have passed a life settlement legislation. As of now, this leads to 44 out of 52 US states and other jurisdictions having in place comprehensive guidelines and directives to protect all market participants involved in life settlement transactions. Due to this increased governmental overwatch, the life settlement industry has become a very attractive and transparent marketplace for insureds and investors.
Though life settlements and mortality-linked contracts are identified as non-correlated — to major investment markets- alternative investment assets, there is a slight correlation between their outcomes.
In times of financial setbacks or global economic hardships (i.e. resulting from Financial Crisis or COVID-19 epidemics), fixed retirement income is frequently not capable to cover the increasing costs of medical assistance or the sustainability of one’s existing lifestyle. In addition to that, mounting personal debt and sometimes an increased cost of insurance can turn a life insurance policy into an unnecessary burden.
With that in mind, many find themselves in a position to seek alternative options than to keep their unwanted or no longer afforded policies.
For investors, a life settlement or mortality-linked contract can help stabilize their investment portfolio due to its benefit of being non-correlated in nature. For decades, many institutional investors (.i.e. pension and endowment funds, investment banks, hedge funds) continue to use this alternative investment asset as one of the viable risk hedging tools.
Evolution of Medical Underwriting
In general, longevity risk is the major risk that affects returns for investors. Thus, it is very critical to have as accurate life expectancy estimates as possible in life settlement contracts.
Like any other industry, medical underwriting has been constantly evolving. Together with the increased number of cases occurring in the life insurance secondary and tertiary markets and the availability of historical medical records, statistical data, supported with the advancement of medical technology, professional life expectancy underwriters are capable to perform their tasks much more efficiently than ever before.
Now, most credible life expectancy providers employ top-of-the-tier medical experts who methodically arrive at a more reliable estimate by not only looking at the insured’s medical profile database but also predicting how the subject insured can be impacted by potential medical diagnosis which is disease-specific.
Furthermore, to reduce exposure to longevity risk significant inroads are being made in the industry to implement risk-hedging solutions. These experts are conducting robust experiments (i.e., DNA testing, facial analysis, etc.) to further improve assessment methodologies in determining an insureds life expectancy.
Increased Consumer Awareness
Previously, senior insureds were not aware of life settlements as an alternative option to surrendering their policies. Respectively, investors were not introduced to mortality-linked contracts as an asset class to diversify their investment portfolios.
According to a research conducted by the Society of Actuaries and Life Insurance and Market Research Association (LIMRA), 90% of senior policy insureds who had their policy lapsed, were unaware of life settlements as an option. They stated that, if they were properly informed regarding such an alternative, they would have considered selling their insurance policies.
At present, many industry professionals aim to bridge this gap by informing and educating all parties involved about the benefits, risks, and the untapped market potential of this investment asset class.
These are a few key factors that have contributed enormously to the continued growth of the life settlement industry. This asset class is steadily moving in an upward direction, gaining momentum, and exceeding expectations.
The 2016 Conning report predicted a 1–2% growth per annum for the industry. In reality, the market has experienced an average growth rate of 34% (according to Magna). According to Steve Webersen, Head of Insurance Research at Conning “There are several other drivers that favor continued growth in the life settlement market. The increased supply of investors will have a larger number of policies to select from because of the increasing number of retiring baby boomers Additionally, the broad regulatory environment surrounding life settlements has stabilized and an increasing supply of settled policies supports the continued development of the tertiary market”.
To conclude, the future of the industry looks brighter with several drivers being the contributors to the resurgence and advancement of this asset class growth. Furthermore, It appears that Conning — a renowned investment firm- predicts by 2028 the life settlement market space will mature to approximately $212 billion in face value. The report has also forecasted the volume of new life settlements to be roughly $6.4 billion.
To learn more about adding this product to your or your client’s portfolio, contact one of our specialist at VIP@life-xcel.com or 213–533–9002