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May 23, 2005 at 08:00 PM
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 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.
The study, “The Life Settlements Market–An Actuarial Perspective on Consumer Economic Value,” looks at contract holder options: surrendering the contract for a cash surrender value; selling the policy in a life settlement transaction and retaining the policy until death.
Massachusetts Mutual Life Insurance Co., Springfield, Mass., was among the insurers that sponsored the study.
Life settlements have a risk profit component that represents 30% of the economic value of the contract and 70% representing transaction costs, according to the study.
Transaction costs were broken out as follows: expense profit, 5%; taxes, 26%; selling commission, 14%; servicer, 7%; provider, 7%; and broker, 11%.
The study compared transaction costs with other types of investments and found a .01%-1% cost for stocks; 1% to 2% for bonds; 0% to 5% for mutual funds; 3% to 5% for gold; 4% to 8% for residential real estate; 10% to 15% for art; and 50% to 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% to 77%.
