View more on these topics

This is your life settlement

Sven Kuhlbrodt, global sales director at PDL International, says the life settlement market is misunderstood by many and advisers should take a fresh look as the sector can offer investors significant advantages

As an asset class, life settlements have not had an easy introduction to the UK marketplace and highprofile mistakes have been made with how they have been communicated and sold.

However, these issues have not been down to the product. The asset class itself remains a good one, offering unique benefits to investors.

Life settlements offer investors a way of generating potentially good returns without the need to access traditional markets so they could be a suitable uncorrelated asset to hold in a well diversified portfolio. After all, who would doubt one of the biggest purchasers of life settlements – Warren Buffett?
Life settlements are worth getting to know a bit better.

As life settlements have grown in popularity, the FSA has run its rule over them to identify potential risks to investors.

Like all asset classes, they have certain risks but the market for life settlements is maturing and new players are coming in to the market and are addressing these risks through product innovation.

Mitigating risk

One of the issues levelled at life settlements is that the products profit from someone’s death. This not only ignores the fact that the management of longevity risk is a fundamental aspect of financial planning but it also ignores the fact that the original policyholder has benefited from the sale of their policy they no longer want.

In the US, $1.4trn in life insurance policies lapsed last year because policyholders either no longer wanted them, could no longer afford them or felt their policy was no longer suitable for their needs.

By providing a secondary market, these policyholders can derive significant value instead of ending up with nothing despite years of premium payments.
Another challenge thrown at life settlements is that of longevity risk.

Here again, providers are developing and structuring products which can reduce or mitigate this risk. In addition to better life expectancy estimations, some life settlement providers are looking to build in additional premium payment cushions into their policy payment plans. Others escrow away a contingency fund which can be used to pay additional premiums. This kind of product innovation, which is a progression from the more traditional life settlement fund, is symptomatic of a maturing market.

The relative illiquid nature of the asset class has also been remarked upon.

Typically, we would suggest that investors hold no more than 10-15 per cent of their portfolio in life settlements. Therefore investors’ liquidity would come from other more liquid assets.

However, the longer term aspect of life settlements – which is no bad thing – can make them suitable for retirement planning, which is a longer-term investment strategy.

A maturing market

In addition to product providers raising their game, the life settlement sector in the UK is taking a more mature and sophisticated approach.

Advisers can take heart from the fact that the European Life Settlement Association has recently published its code of conduct, which aims to provide industry standards for its members to help give additional comfort to investors in this market.

As a result, we believe that future products will be more transparent and easier to understand.

The uncorrelated nature of life settlements makes the asset class ideal for investors to diversify into.

Diversification is one of the pillars of financial planning but this is little help when assets all seem to be moving in a downward direction at the same time as in autumn 2008 when stockmarkets halved in value at the same time as returns on property, cash and corporate bonds also crashed.

Life settlements, on the other hand, offer some significant advantages to investors who want to diversify a portion of their portfolio.

These include: returns uncorrelated to financial markets, a known maturity value, low volatility and potentially strong returns. In a nutshell, they can offer investors a degree of certainty in an uncertain world.

Take a closer look

We recognise that life settlements have been a soft target for some commentators but the asset class is coming of age.
Providers are developing new products that mitigate the traditionally associated risks and making them more accessible and appropriate for retail investors.
For those who recognise the positives and are prepared to take a closer rational look, they will see the benefits of presenting an investment strategy that learns from the mistakes of the past and invests clients in an uncorrelated and more certain asset class.

Life settlements are a secondary market for US life insurance policies.
In a life settlement investment fund, the original owner of a life insurance policy sells the policy on to a third party (in this case the investment company) for a price usually higher than the surrender value of the policy but lower than the sum assured.
Typically, transactions involve policyholders of 65 or older.
Following the sale, the new owner of the policy has to maintain the premiums on the policy and when the insured dies, the new beneficiary gets the death benefits.

The life settlement industry has in the past been questioned over the ethics of benefiting from the death of the underlying policyholders.
In February this year, the FSA raised concerns about the marketing of life settlement investments with head of investment policy Peter Smith saying: ’If it is such a good product, why do you have to pay people so much to sell it?’
The FSA said it also had concerns about the ’real and significant’ risks caused by a lack of diversification in some funds, and by illiquidity and counterparty risk.
In July, the US Senate raised concerns about the valuations being placed on life settlements as well as the high levels of fees that sellers of life insurance policies are being asked to pay.How life settlements workcriticisms of life settlements



ABI will keep TPD name

The Association of British Insurers has agreed to keep the term “total permanent disability” ahead of the publication of its updated statement of best practice for critical illness, due early next year. The TPD clause within CI policies accounts for 3 per cent of claims, but of those over half are declined due to confusion […]

Irish Govt set to nationalise Bank of Ireland

The Irish Government is preparing to take a majority stake in the Bank of Ireland. It means Ireland is left with no big, independent lender. The increased Government stake is part of the talks surrounding the bailout package from the European union and the International Monetary Fund, according to the Financial Times. The package, which […]

Execution-only firms say fees will go higher

Execution-only platforms say the FSA’s platform consultation paper will fail to reduce fund fees and might even lead to prices rising. Cutting fees is a core aim of the RDR, with the FSA stating it would be “surprised” and “disappointed” if fees are not reduced as a result of the measures. The FSA paper said: […]

Gartmore loses focus

When I was a reporter, press day at Money Marketing was a fun-packed affair. It helped if we had a ready-made splash by the time we arrived at the office on a Tuesday morning – a decent story that financial advisers did not know about and one that would beat our rivals hands down. But […]

Happy while you work

Well we’ve had scorching weather (yes even up here in Scotland!) and now the Euros 2016 are on – you can’t blame people for wishing life was just one big holiday.  With all these distractions it sometimes feels like work just gets in the way of having a good time! But sunny day skivers are […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm