A new study funded by insurers says that policyholders who are seeking the best economic value for their life insurance policies should understand the costs associated with life settlements.
The study, “The Life Settlements Market–An Actuarial Perspective on Consumer Economic Value,” looks at options for contract holders: surrendering the contract for a cash surrender value, selling the policy in a life settlement transaction and retaining the policy until death.
The report finds that life settlement values are higher than cash surrender values but lower than the intrinsic economic value of retaining the policy until death.
Life settlements, according to the study, have a risk profit component that represents 30% of the economic value of the contract and 70% that represent transaction costs.
Transaction costs were broken out as follows: expense profit, 5%; taxes, 26%; selling commission, 14%; servicer, 7%; provider, 7%; and, broker, 11%.
The study compares transaction costs with other types of investments and finds a .01%-1% cost for stocks; 1-2% for bonds; 0-5% for mutual funds; 3-5% for gold; 4-8% for residential real estate; 10-15% for art; and 50%-67% for life settlements.
The report examined the face amount of life insurance contracts in New York between 2000 and 2003. As a percent of the face amount on New York schedule 8 filing, total death benefits for that period had an average of 64% with a range of 56%-77%. The life settlement values for the selected contracts had an average of 20% as a percent of face amount. The range for life settlement values was between 17%-33% as a percent of face amount.
The report, prepared by Deloitte Consulting LLP and the University of Connecticut, indicates that the lost economic value–the difference between the death benefit ratio and the life settlement value ratio–was 44%. The range for lost economic value was 38%-49%.
Massachusetts Mutual Life Insurance Company, Springfield, Mass., was among the insurers that sponsored the study.
Consumers should know that life settlement transactions are very expensive, says John Skar, a MassMutual senior vice president and chief actuary. The option of holding a policy until death should be noted in life settlement marketing materials, he says.
Skar challenges the notion that insurers are concerned that the life settlement business will cause more policies to be kept in force resulting in greater costs at some point in the future. “I’m saying that people should retain their policies,” he says.