Over the past few years life settlements have become a more attractive investment opportunity and there is an increase in the amount of hedge funds which are being formed to invest in various life settlement strategies. This article will discuss life settlements and will introduce some of the issues which hedge fund managers should discuss with their attorney if they want to start a life settlement hedge fund.
From Viaticals to Life Settlements and Premium Finance
Life Settlements are the younger sibling to the Viatical industry which was popular in the 1980’s with regard to AIDS patients (see SEC description of Viatical’s below). A “life settlement” usually refers to a secondary market transaction on an insurance policy. Typically an insured will sell its insurance policy to a third party (the investor) who will pay the insured more than the cash surrender value of the policy, but less than the death benefit. The investor will then be liable for the premium payments and will receive the death benefit upon the death of the insured.
Other industries have developed out of this market including the premium finance industry which will provide loans to individuals or investors to finance the premium payments of the life insurance policy. Generally the premium financiers will charge above market rates for the loans. Premium finance agreements can take any number of different forms and often these arrangements may include an option for the financier to take over the insurance policy in some circumstances.
Life Settlement Hedge Funds
As the life settlement market continues to grow it is expected that hedge funds will move to utilize this strategy in greater force. There are many issues which life settlement hedge fund managers need to be aware about including potential investment advisory registration, regulation of life settlements as securities at the state level and other business risks of the strategy (e.g. the two year contestability period). Our group will be providing more information on the issues which a hedge fund manager must contemplate when establishing a hedge fund focused on the life settlement industry. Please also contact us if you are thinking about setting up a life settlement hedge fund.
The article below, which can be found here, is from the SEC and discusses viatical investments in general. Other HFLB articles on life settlement hedge funds (forthcoming):
- Life Settlement Hedge Funds – Structural Considerations
- Are Life Settlements Securities?
- Life Settlement Tax Issues
A viatical settlement allows you to invest in another person’s life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit.
Your return depends upon the seller’s life expectancy and the actual date he or she dies. If the seller dies before the estimated life expectancy, you may receive a higher return. But if the seller lives longer than expected, your return will be lower. You can even lose part of your principal investment if the person lives long enough so that you have to pay additional premiums to maintain the policy.
Viatical settlements can be risky investments. For these reasons, you should exercise caution and thoroughly investigate before you consider investing in a viatical settlement.
Many state insurance commissioners license the companies that buy viatical settlement to sell to investors and may have information about a specific company or viatical settlements in general. To find out who your state insurance regulator is, please visit the website of the National Association of Insurance Commissioners. The Federal Trade Commission also has information for those who are considering selling their life insurance policies.