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%.

The life settlement values for the selected contracts were an average of 20% of the policies’ face amount. The range for these values was between 17% and 33% of face amount.

The report, prepared by Deloitte Consulting LLP and the University of Connecticut, indicated that the lost economic value of a life settlement was 44%, which represents the difference between the death benefit ratio and the life settlement value ratio. The range for lost economic value was 38% to 49%.

Consumers should know that life settlement transactions are very expensive, says John Skar, a Mass Mutual 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 adds.

Policyholders are being convinced to sell their policies because they are shown a comparison of cash surrender values and life settlement values but not told about the greater values possible by holding a contract until death, according to Skar.

By their own analysis, insurers ought to be ought to be offering better cash surrender values than they have, responds Doug Head, executive director of the Viatical and Life Settlement Association of America, Orlando, Fla.

“The insurance industry is well positioned to help by competing for policies that are sold and driving up values,” Head argues. “They have not done so. Why aren’t they offering more or going into the settlement business. Why are they not bringing capital in?”