Frequently Asked Questions
What are the social benefits of life settlements?
A growing number of Canadian seniors are seeking out alternate options to enhance their cash flow in retirement. Living to older ages and increasing health care costs are contributing significantly to an increased need for income in retirement.
Life settlements offer numerous benefits to seniors wishing to maintain or improve their financial independence while discontinuing their financial obligation to continue to pay premiums. Seniors with no further need for life insurance or who need additional funds for retirement expenses receive fair economic value for years of accumulated premium payments; substantially higher proceeds compared to that offered by insurance company on surrender or a policy loan; and an alternative source of liquidity as opposed to selling a home or other financial instruments at an inopportune time.
Further, in June 2013, eight states (California, Florida, Kentucky, Louisiana, Maine, New Jersey, New York and Texas) introduced Medicaid Life Settlement legislation to enable and encourage people to sell their life insurance policies to pay for long-term care or homecare without compromising their ability to qualify for Medicaid. Texas was the first state to enact the legislation in September 2013, which grants authority to the Medicaid department to inform policy owners that they can sell their policies; and allows policy owners to use the proceeds of life settlements to pay for a Medicaid qualified “Long Term Care Benefit Plan” instead of having to abandon a policy in order to be eligible for Medicaid.
Florida Health Care Association: “… [the life settlement] approach will give seniors more choice, including whether to receive care at home for a longer period of time or cover their nursing facility care costs if that type of medical care is more appropriate.”
Medicare website: “You might be able to sell the life insurance policy for present value. The money from the sale can be used to pay for your long-term care needs. If you don’t qualify for long-term care insurance, this may be an option to pay for your long-term care needs.”
U.S. Department of Health and Human Services on its website www.longtermcare.gov has a page devoted to “Using Life Insurance to Pay for Long-term Care” which includes a section on life settlements.
Assisted Living Federation of America, an association of assisted living companies and related long-term care companies, has advocated the settlement of a life insurance policy as a means of payment for assisted living.
National Conference of Insurance Legislators (NCOIL) President, Rob Damron: “It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers… including conversion to long term care.”
Florida AARP Spokesman, Jack McRay: “I believe it could be a win for Medicaid service recipients, a win for the fiscal soundness for Medicaid, it could be a win for potential beneficiaries under life insurance policies and I think it could be a win for long-term care service providers.”
Florida Legislation sponsor, Rep. Jimmy Patronis (R-FL): “Right now life insurance policies are being abandoned so the senior can receive Medicaid. If passed, both the state and the policyholder would benefit. It’s pretty innovative… It should be a win-win all the way around.”
How does the global life settlement market work?
The life settlement industry is very mature. While life insurance was established as an asset that can be bought and sold in the U.S. courts more than 100 years ago, it has begun to flourish in the last 20 years.
The U.S. Supreme Court established life insurance as transferable property in Grigsby v. Russell, 1911. The best estimates for U.S. market size range between $60 billion and $80 billion in the secondary market (initial policy sale from insured to a third party) since 1998. Volumes grew from approximately $200 million in 1998 to over $1 billion annually for three to four years and then grew rapidly from 2004 through 2008. However, a large number of transactions have been completed in the tertiary market (sale of a life settlement from one investor to another), which include multi-billion-dollar (face value) portfolios that have occurred between financial institutions. These estimates exclude viatical transactions, life insurance sold by the terminally ill with life expectancies of less than two years.
Multinational banks, global insurance companies, pension funds, hedge funds and other major financial institutions have invested or participated in the life settlement market over the last 15 years. Two of the largest insurance holding companies in the U.S., Berkshire Hathaway and American International Group (AIG), have been significant participants including the sale of an $18.5 billion portfolio by AIG to the U.S. Treasury. Other institutional activity includes:
California Public Employees’ Retirement System (CalPERS), the largest pension fund in the U.S. with $265 billion in AUM owns a $200 million life settlement portfolio according Pensions & Investments, September 2008;
Fortress Investment Group purchased a portfolio of $6.5 billion (aggregate face value) from Belgian bank KBC;
Apollo Global Management, a global investment manager with more than $160 billion of assets under their management, has deployed $443.2 million in its Financial Credit Investment I fund Apollo to purchase a $600 million portfolio from Royal Bank of Scotland in August 2013 and a $320 million portfolio from ARM Asset-Backed Securities in November 2012;
Kohlberg & Company, through their asset management arm, Chronos Investment Advisors, owns a $1 billion portfolio of life settlements; and
Berkshire Hathaway purchased a $300 million face value, 100-policy portfolio from Coventry First in July 2013. Gen Re, global reinsurance and risk management of Berkshire, invested $400 million in Living Benefits Financial Services, a life settlements provider.
What is the truth about the Canadian life settlement market?
Life insurance companies benefit when a policy lapses or is surrendered. They also benefit when they receive premium payments as their business model is driven by collecting premiums, investing the proceeds and earning return greater than benefit obligations over time. As the life settlement market has developed in the U.S., some life insurance companies have started to use the existence of market liquidity for policies as a selling feature for underwriting new policies.
In Canada, there is some confusion concerning the life settlement industry. The provinces of Quebec, New Brunswick, Nova Scotia and Saskatchewan permit the life settlement transaction. Life insurance companies benefit when a policy lapses or is surrendered. They also benefit when they receive premium payments as their business model is driven by collecting premiums, investing the proceeds and earning return greater than benefit obligations over time. As the life settlement market has developed in the U.S., some life insurance companies have started to use the existence of market liquidity for policies as a selling feature for underwriting new policies.
There is considerable potential for the Canadian life settlement market. At the end of 2014, there was $2.3 trillion in outstanding individual life insurance face value in Canada. Life settlement transactions are currently permitted in four provinces with a total $608 billion in insurance outstanding, 71% of which are whole life or universal life policies.
In the U.S., 14% of policies are estimated to be owned by persons over the age of 70 and of these 3.5% lapse each year representing approximately USD45 billion according to a joint study by the Society of Actuaries and Life Insurance Market Research Association (LIMRA). The data in Canada is less specific but overall numbers are very similar meaning there is potentially over $5 billion of lapsed or surrendered policies in our target demographic annually in Canada and $1.8 billion annually in provinces where life settlement transactions are currently permitted. Not all policies will be suitable for life settlements but there is a large pool of potential supply.
While there is limited data available in Canada that illustrates lapse rates by attained age or policy type, an October 2007 study by the Canadian Institute of Actuaries found composite lapse rates for universal life policies of 4.8%. If it is assumed that overall lapse rates in Canada are similar to those in the U.S., or 6.1% overall, then an estimated $130 billion in face value of policies lapse or are surrendered annually from a pool of $2.2 trillion in the individual life insurance market in Canada ($608 billion in the four provinces where life settlement transactions are permitted.
Assuming the same lapse rates as in the U.S., (average lapse rate of 2.9% for age 75 and over) and based on the LIMRA Study indication that the age 70 and over population of insured people represents over 14% of the total, it is estimated that there is between $1.5 billion and $2 billion of face value of policy lapses annually in the four provinces where life settlement transactions are permitted.
Professor Lauren Cohen of Harvard likened restricting people from selling their insurance to forcing homeowners to only being able to sell their homes back to the bank holding the mortgage. Other than selling, a policyholder has the following three options:
lapse the policy and receive no value;
surrender it to the insurance company and receive accumulated excess cash value, if any; or
borrow against the policy’s cash surrender value in an amount typically up to 90% of the surrender value (the loan must be repaid and premium payments continued).
Several states including Washington, Oregon and Maine, have revised their life settlement statutes to require that policy owners be advised by their insurance advisers of their full range of options, including selling, when deciding what to do with an unwanted (or unaffordable) life insurance policy. As a result, policy owners resident in these states will be aware of life settlements as a possible solution for them.
How does the basic life settlement transaction unfold?
Life settlements typically begin with a policyholder asking his or her financial advisor or insurance agent about options to deal with unneeded or unaffordable insurance. If the decision is made to sell the policy, basic policy and health information will be provided to a life settlement provider who will consider the suitability of the policy. If the policy meets basic suitability tests, further work is done to verify the insurance coverage, the insured’s medical status and the insured’s willingness to sell at an appropriate price. A final offer for any policy is made only following thorough due diligence of medical underwriters reports and legal documents. Once accepted, a closing package is delivered to the insured’s advisor for signing. These documents are then returned to the life settlement provider and, assuming everything is complete, the insurance carrier is notified. Following written verification of the change of ownership of the policy, payment is made to the insured or policy owner (as applicable).
True economic value is the fairest price for sellers. Because lifespan cannot be known in advance, it is impossible to know the precise economic value at any given time for any individual policy. However, prudently determined life expectancies, those obtained by experienced underwriters, provide the best guideline for making an estimate of the policy’s investment “horizon”. When combining this with other important inputs such as premium amount, face value, discount rate, etc., a reasonable approximation of true value can be determined.
Our process of acquiring life insurance policies is thorough in terms of due diligence and legal documentation. Once an insurance broker/agent, on behalf of policy seller seeking to surrender, lapse or sell a policy, provides notice of an available policy, the following process takes place:
determine initial pricing using the standard mortality tables for seller’s review;
order insured’s medical records and obtain two life expectancy assessments from qualified experts;
generate insured’s specific mortality curve by applying, among other things, smoking status, gender and life expectancy to the standard mortality tables;
input policy and insured details into our pricing model to calculate final pricing;
review of all documentation; and
submit offer price and closing documentation to broker for seller’s review.
Beneficiaries, if any, are required to sign a document, “Release and Waiver of Beneficiary Rights and Change of Beneficiary Consent”, in order for the sale and policy transfer to be completed.
Individuals selling their policies in Canada are not required to get legal advice. However, the closing documents recommend sellers obtain it and require sign-off if it is declined.
Unlike in the U.S., the Canadian life settlement market does not have a specific regulatory framework. The manager adheres to best practices developing other jurisdictions designed to avoid problems that may have occurred in the early stages of the other markets’ development. Parties associated with the sale are required to sign the following, which are then submitted to the insurance company for formal notice of ownership and beneficiary change:
“Life Settlement Agreement” – offer acceptance of transaction signed by the seller;
“Disclosure Statement” – signed by seller;
“Distribution Direction” – signed by seller;
“Release and Waiver of Beneficiary Rights and Change of Beneficiary Consent” – signed by each beneficiary;
“Cooperation Agreement of Insured” – signed by insured;
“Insured Designation of Contacts” – signed by insured;
“Agreement and Consent of Seller’s Spouse” – signed by seller’s spouse;
“Physician’s Letter of Competency” – signed by each of the insured and seller;
“Disclosure of Liens and Debt” – signed by seller; and
Policy ownership and beneficiary change forms.