Why is this Topic Important to Wealth Managers? Discusses the general market conditions of life settlements. Also provides reasons why some policy holders may consider selling their interests.
As discussed earlier this week, a traditional life-settlement transaction consists of an third party purchasing an unknown individual’s life insurance policy for consideration. The purchaser continues to pay the premiums until a death benefit is collected, the contract is sold to another individual or business, or is surrendered.
The Wall Street Journal attributes the creation of the industry “back to the 1980s, when [terminally ill] patients sold their policies to raise cash for medical treatments.” The Journal also notes, the “market boomed earlier this decade, as hedge funds eager for offbeat alternative investments piled in.” 
Since the decline in overall macroeconomic market conditions, “the total face value of policies purchased in the secondary market fell to $7 billion in 2009 from $13 billion in 2008”. “Prices for policies, meanwhile, fell to an average of 13% of the death benefit in 2009 from 21% in 2006.”  Nevertheless, industry experts are expecting a rise again in total market figures by the end of 2010. It is not surprising given the SEC’s new enforcement efforts discussed below.
There is significant data nevertheless that consumers “benefit from a robust secondary market for life policies.” “Before the life-settlement industry grew, life-insurance companies were the sole buyers of unwanted policies. Now consumers have a choice, and the chance to get more if they cash their policies in.”  “Selling an insurance policy frees up cash for current needs, such as pricey long-term-care insurance, especially if the policyholder doesn’t have other assets that can be easily liquidated to pay the premiums.” 
There are a number of “factors that would induce a policyowner” to decide to sell their policy to a third party. First, a “policyowner might not be able to afford to keep a whole life policy in force before death—especially if his income stream unexpectedly declines or if the premiums increase or both.”  Secondly, a policyholder might own multiple policies and no longer have an insurable need for that amount. Other reasons may include but are not limited to: 
• The beneficiary for whom the policy was originally purchased is now deceased or no longer has a need for the policy.
• A reduction in the value of the policyowner’s estate reduces the tax liability for which the life insurance policy was designed to provide.
• The policyowner wishes to donate highly appreciated assets to charity, but would be faced with liquidity constraints as the result of such a donation.
• The policyowner can no longer afford to pay the premiums on the policy, and it is not feasible for him to keep the policy in force by using any program offered by the insurance carrier (such as borrowing the premium against the death benefit of the policy)
Just last month the Securities and Exchange Commission released a report “recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws.”  The new regulation would encourage more investors to consider life settlements as viable investments.
Next week’s blogticles will discuss the taxes Americans pay generally. After-all Halloween is approaching and the subject is rather scary.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 Anne Tergesen and Leslie Scism. “Life Insurance: Think Before You Sell Your Policy for Cash”. Wall Street Journal Weekend Investor. September 18, 2010. http://online.wsj.com/article/SB10001424052748704190704575490070397807704.html?KEYWORDS=life+settlements. Last Accessed 10/15/2010.
 Wall Street Journal noting a Recent Report by the U.S. Government Accountability Office.
 Hal J. Singer, Eric Stallard. “Reply To The Life Settlements Market: An Actuarial Perspective on Consumer Economic Value” at 2. 2005. https://www.lifesettlementfinancial.com/pdf/Reply_Deloitte_Study.pdf. Last Accessed 10/15/10.
 “New Lease onLife: The Secondary Market in Life-Insurance Policies is Good for Consumers”. The Economist. May 17, 2003.
 Rachel Silverman. “Recognizing Life Insurance’s Value”. Wall Street Journal. May 31, 2005.
 Singer at 17.
 SEC Releases Report of the Life Settlements Task Force 2010-129. http://www.sec.gov/news/press/2010/2010-129.htm. Washington, D.C., July 22, 2010. Citing, “Staff Report to the United States Securities and Exchange Commission”. July 22, 2010. Life Settlements Task Force. http://www.sec.gov/news/studies/2010/lifesettlements-report.pdf.