The history of the life settlement industry has been quite tumultuous and eventful. Major historical events form significant parts of the success stories in this industry, some dating back to as early as 1911. Regardless, the singular most prominent event that propelled the life settlement industry into the limelight was the health events in the 1980s.
During this period, there was a new virus epidemic that was later named HIV/AIDS. Barely two decades earlier in the 1960s, the revolutionary contraceptives and family planning were developed, and the majority of conservative thinkers thought that the epidemic was a consequence of the unregulated sexual activity. But that is beside the point.
The disease was so grievous that it spurred the research into ways in which life insurance policy could be turned into a financial resource to benefit those who have been insured. The financial need for those who had HIV/AIDs in those days affected both the young and the old. Amidst all this, it was evident that the life expectancy of an individual is not just determined by age.
So, a new market called the viatical contract emerged in response to the financial demands to treat what was then a fatal illness to help those infected to pay for their much-needed healthcare. This single epidemic is what started a domino effect toward maintenance and sustenance of the life settlement marketplace.
- What is the life settlement marketplace?
- How big is the life settlement market?
- Viatical settlements vs life settlements
- How do they benefit each other?
- Building a brand around trust
Let’s continue from where we left with HIV/AIDs to explain this concept. When the virus first emerged, there were still no clinically proven therapeutic strategies reminiscent of what we have today. But in the subsequent years, as research progressed on HIV, the mortality rates of the disease were reduced, and people could live longer. This was a significant milestone in healthcare, but it also meant that the life settlement industry had to adapt.
As the mortality rates reduced, the older generation started considering the possibility of selling their life insurance policy to a third-party in what was known then (and is still known now) as a life settlement contract. Thus, a life settlement is defined as the legal sale of an existing life insurance policy to a third party in exchange for a one-time cash payment that is usually more than the cash surrender value and often less than the net death benefit.
A life settlement marketplace, on the other hand, is a term that describes the industry serving as the secondary market for any existing life insurance policies. This secondary market provides the consumers of life insurance with an alternative to a lapse of a life insurance policy. The transaction is called a life settlement. It is when the owner of a policy sells it for a fair value in the market to financial institution licensed by the state. This financial institution is the life settlement provider.
After the great financial crisis of 2008, the economies of the life settlement industry were quite uncertain. From 2009 through to 2010, there was a significant downturn that threatened to shake the industry to its core. But by 2014, we started noticing substantial signs of a steady recovery in life settlements. Market participants in all the major segments of the industry were reporting high transaction volumes. Moreover, Conning & Co. forecasted that from 2014 to 2023, the average annual gross market potential of life settlements would be equal to or greater than 180 billion US dollars. This forecast meant that the average volume of life settlements transactions’ annual gross market potential would be about 3 billion US dollars. With the current prevailing circumstances, this market value is yet to increase spontaneously. The business model of this industry also allows for growth because it is easy to scale.
If you are researching this industry for the first time, it is common to get confused about the difference between life settlement and viatical settlements. Understanding the difference between these two entities is vital to help you make the right decision about your investment in the life settlement marketplace.
A life settlement is best defined as a trade between the life insurance policyholder and the purchaser. In contrast, a viatical settlement is the sale of an existing life insurance policy for cash in a discounted form. To better understand the concept of viatical settlements, let us draw inspiration from the 1980s when all it all started.
See, after being diligent investing in their life insurance, people with terminal illness realized that they could benefit from their insurance policies if they sold them. The idea was that they were going to die in a few days or months anyway. Viatical settlements are explicitly designed for people who predictably have two to four years of life expectancy left.
Viatical settlements are a good policy plan for people with terminal illnesses or those who know that they will accumulate more hospital bills when they die. In such cases, the viatical settlement will cater to the bills and protect the family from the trouble of looking for money to settle the hospital bill.
Investing in viatical settlements requires that you consider only reputable companies because the value of the money is volatile. For instance, the return is lower if the individual lives longer, and being that viatical settlements are based merely on speculation on death, the value of returns is somewhat unpredictable.
On the other hand, a life settlement is more of senior investment and not an investment for the terminally ill. This is a one-time cash transaction that occurs when the policy owner thinks that he or she has unwanted life insurance. Thus, the life insurance policyholder is at liberty to sell the policy or transfer ownership in exchange for a lump sum of cash. The cash settlement is often huge and can be three to four times greater than the cash surrender value.
The question on why sell your life insurance to someone else is always common among people who least understand the investment process in the life settlement industry. The truth of the matter is that society has changed in ways we hadn’t anticipated. The elderly generation is increasingly in need of life settlements to help them cater to life changes such as divorce, retirement, and payment for financial ventures of their children.
But such benefits from the life settlement industry can only be a guarantee in a stable life settlement marketplace. There are various ways in which the life settlement industry has benefitted from the life settlement market. Some of them are as follows.
The competence in the life settlement marketplace ensures that only advisors who are experts at what they do are available to the investors. These advisors help in generating substantial liquid assets at the right time when you need them the most. Achieving liquidity in the majority of marketplaces is quite hard, especially for new entrepreneurs. But life settlement marketplaces have mastered the art of generating liquid assets for their clients that need them when they need them.
The financial crisis of 2008 threatened to shut down quite a number of sectors and industries that relied on significant cashflow to remain operational. The life settlement marketplace was equally hit so hard that it took two years to start the recovery process. However, the business model in this industry ensured rapid growth in life settlements, and it is currently one of the most promising sectors worldwide.
Marketplaces are quite easy to scale, and this can be done exceptionally well. It has a persuasive proposition that attracts several investors and customers. This ease of scalability is also one of the things that have made it easy for the life settlement industry to grow. This is the reason why PwC estimates that global revenues from this sharing economy could reach over 300 billion US dollars by the year 2025.
Building a brand in the life settlement industry provides tremendous opportunities for success despite having its own challenges that quite often are difficult to overcome. An excellent and profit-generating brand should be able to leverage the advantages of the business model while, at the same time, mitigating the challenges.
Building trust in the life settlement industry
Marketplaces, in general, require more work than the traditional business when establishing itself as an entity to be trusted by users. This trust isn’t easy to achieve because users have to trust each other first, and then they have to trust the marketplace to deliver what they want. Commonly, users will only put their money into a platform that they trust, especially when their safety, livelihood, and health are involved.
The first thing that entrepreneurs do to foster trust in the marketplace is to create social proof. The online space provides an incredible opportunity for entrepreneurs to develop their social proof. This can be achieved by enabling your previous clients and customers to leave reviews about the services that you offer.
Transactions are also a significant point of contention when discussing trust in a marketplace. But since a third party can process the transactions in the life settlement marketplace too, it is relatively easy to minimize the financial that can make investors lose their money.
As an entrepreneur, it is the best practice to own the transaction process to help the marketplace to combat common challenges affecting investors. One of these challenges is platform leakages, also known as intermediation. This is when the buyer and the seller decide to have their transactions outside the influence of a third party which is usually the life settlement marketplace.
This challenge exposes the buyer and seller to potential scams. It also rids the platform off of commissions that are always generated from such transactions. Therefore, the two simple ways to build trust in the life settlement marketplace is to have sufficient social proof and also create a platform where the security of transactions is guaranteed.
How to enhance transparency in the life settlement industry
Every marketplace requires transparency for various reasons. For instance, transparency is one of the things that attract investors to the marketplace. As Jeremy Kelly, the JLL’s research director, writes: “highly transparent markets account for around 75% of all commercial real estate investment globally.” This means that investors are always drawn to marketplaces with favourable conditions for operations. Kelly goes on to suggest that, “transparent market practices alongside performance benchmarks and availability of data compounds the significance of transparency at the marketplace.”
Transparency in the marketplace goes hand-in-hand with trust. In typical marketplace situations, a lack of transparency always enables a lack of accountability. And when there is no accountability in any marketplace, an opportunity is created for fraud and deceit to flourish. This is not ideal for business or entrepreneurship of any kind.
Thus, methods such as interoperability, data accessibility, transaction security, and data privacy are some of the things that can be harnessed to enhance transparency in the marketplace.
The life settlement industry has benefitted so much from the life settlement marketplace. Despite its challenges, the business model of the marketplace still encourages transparency and enhances trust between buyers, sellers and other entrepreneurs taking part in the transactions.
- Braun, Alexander; Xu, Jiahua (2020-03-31). “Fair Value Measurement in the Life Settlement Market”. The Journal of Fixed Income. 29 (4): 100–123. doi:10.3905/jfi.2020.1.084. ISSN 1059-8596
- Braun, Alexander; Cohen, Lauren H.; Malloy, Christopher J.; Xu, Jiahua (2018-06-05). “Introduction to Life Settlements”. Harvard Business School Background Note (218–127).
- Bozanic, K.J., 2008. An investment to die for: From life insurance to death bonds, the evolution and legality of the life settlement industry. Penn St. L. Rev., 113, p.229.
- Seitel, C.L., 2006. Inside the Life Settlement Industry: An Institutional Investor’s Perspective. The Journal of Structured Finance, 12(2), pp.38-40.
- Seitel, C.L., 2007. Inside the Life Settlement Industry: A Provider’s Reflections on the Challenges and Opportunities. The Journal of Structured Finance, 13(2), pp.70-75.
- Spalding Jr, P.F., Spalding Jr Philip F, 2012. System for facilitating life settlement transactions. U.S. Patent 8,160,902.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.