Life settlements are a win-win for consumers and investors

The FINANCIAL — Americans who sold their unwanted life insurance policies, collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies, according to the research based on a study of more than 9,000 life insurance policies.

“The evidence suggests that the life settlement market has helped significantly in enhancing the welfare of policy-owners who, instead of surrendering, sold their life insurance policies in the secondary market,” said Narayan Naik, Professor of Finance, London Business School.

The study also found that the average expected return for qualified, institutional investors purchasing the large sample of life settlements was 12.5% per annum, which was 8.4% in excess of treasury yields. During recent years, the study found that the average expected return had risen substantially to 18.3% per annum in 2011, some 15.9% in excess of treasury yields.

As the expected return depends critically on the life expectancy of the insured, the independent and comprehensive study conducted sensitivity analysis. It found that even if you assumed life expectancy estimates had been understated by three years, investors purchasing this sample of life settlements could still have expected a positive return of 3.2% per annum.

Given the expected return and the fact that longevity risk is largely uncorrelated with other financial markets, Professor Naik’s concludes: “The life settlement option appears to be an interesting investment opportunity for institutional investors willing to include longevity risk in their portfolio and to commit capital for the medium term.”

“ELSA welcomes this groundbreaking research and the spirit of transparency and openness that lies behind it, and believes that further collaboration between the market and the academic community will help cement the industry’s growing reputation as a socially-responsible and financially-compelling alternative to traditional investment asset classes,” said Simon Erritt, Chair, ELSA.