The secondary market in life settlements has suddenly become a huge reality! This has led to intense debate. Let’s try to clear up some of the mysteries.
A bit of history: Assignment and Change of Ownership clauses have always been valuable features of our policies. They have long been used for estate and tax planning purposes. Then about 1990 a surprising use of those clauses came along: viatical settlements for AIDS victims. Lessons were learned when many AIDS patients (happily for themselves) did not die. Viatical policies were typically small. But then life settlements of much larger policies came along; those were for older insureds with ailments. Now, in 2006, life settlements are packaged into securities and sold to investors, large and small. It’s a big business!
We’re talking here about “unaffiliated policies”–the original owners, beneficiaries, and insureds have deliberately relinquished rights (and have been adequately compensated). That’s what takes place in a life settlement.
The term “unaffiliated policy” clears up a lot of confusion. Ownership of such policies by strangers is O.K. because the original owners, having been adequately compensated, are actually glad that this market came along. The important previous rules about insurable interest, suitable size, etc., are seen as relating back to the original point of sale.
About the previous situation: The parties must have decided that the former reasons for the insurance no longer apply, for such reasons as retirement, close-down of business, families now grown up, etc. So the policy is a candidate to become unaffiliated. Presumably, any settlement offer considered would be higher than the current cash value of the policy.
Chart I, which speaks for itself, shows secondary market sources. I’ll comment only about item 2: life settlement of more recently issued policies. This involves large-amount, older-age business, which has become common because of increased life expectancy, longer working lives, and estate concerns. We shouldn’t interfere in its sale, but a whole host of better underwriting tools are needed for this market.
Chart II shows current concerns about the secondary market.