“One can survive anything nowadays, except death.” --Oscar Wilde

While medical advances continue to improve life expectancy, immortality, as Wilde mordantly observed, remains out of reach. Death is still a sure bet, and those odds are catching the attention of an increasing number of investors looking to life insurance policies for long-term investments.

The secondary life insurance market, which helps accommodate a transaction known as a “life settlement,” is providing an attractive long-term investment option that offers steady gains and is less vulnerable to tumultuous market conditions such as those currently rocking the world’s major financial markets.

A life settlement is a financial transaction in which an investor purchases a life insurance policy belonging to an individual. The transaction is appealing to insured individuals with unneeded or unwanted policies, because they can generally sell the policy on the open market for more than the cash surrender value (the cash value offered by the life insurance company). The investor, as purchaser of the policy, becomes the new beneficiary of the policy and is responsible for any remaining premium payments. Individual policies are often held by a trust, and the investors simply own interests in those trusts.

The life settlement market has experienced explosive growth in recent years, leading to questions regarding what investors will do with the new assets. For example, will investors hold on to the policies until they mature? Will a liquid secondary market evolve? Similarly, will the marketplace be willing to accept bonds backed by life settlements?

Many bankers currently do not have assets to securitize or investors willing to snap up mortgage-backed bonds, and are looking for alternatives. Consider that the banking industry was able to securitize reverse mortgages, a negative cash flow asset. It stands to reason that it will find a way to securitize life settlements as well.

Moreover, the recent announcement of the first-ever swap of a synthetic pool of life insurance policies increases the likelihood of life settlement securitizations. Such swaps are used to level off potentially unpredictable cash flows to investors. One of the major concerns of investors who buy directly into these policies is the lack of liquidity, due to the indefinite lifespan of insured individuals, or an exit strategy. Life settlement-backed bonds could be an alternative solution.

The establishment of life settlements as an asset class will depend on timing, and also on new insurance regulations that many states are in the process of adopting. Once the regulatory dust settles, and with correctly-sized policy pools, the path to life settlement-backed securities may begin to clear.

How can CSC Trust help?

As an independent, non-bank provider of trustee and agency services, CSC Trust has been serving as a trustee and escrow agent in life settlement and premium finance transactions since 2002. We have experience with many different transaction structures, and have proven our ability to be flexible to meet our clients’ needs. Whether your next program or one-off transaction is straightforward or complex, CSC Trust is your go-to partner.

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