Industry Perspective: How Are Life Insurance Policies Grouped Together Into A Portfolio?

People often ask us what happens to a life insurance policy after it has been sold through a life settlement transaction, or, what happens before and after a cash settlement is distributed after ownership of the policy is transferred to the financial institution that purchased the policy? As a policy holder or an advisor, you might be interested in some of the things that happen while a life settlement buyer (known as a provider) purchases your policy and assembles a portfolio.

Policy Valuation. When pricing a life insurance policy, the life settlement broker and provider utilize actuarially sound pricing models that use mortality curves that are similar to those used when a life insurance company first issued a life insurance policy. They review the health of the insured person to understand how they compare to average longevity statistics of the entire population. They look to understand how much annual premiums are as compared to the face amount. They try to use the accrued cash value in the policy to lower the annual premiums due as much as possible. They then use a calculation to determine how much they can offer in a lump sum cash settlement to the policy owner while still retaining a sufficient margin of profit to meet the goals of the portfolio.
Policy Sourcing. Life Settlement providers typically include a variety of policies from different carriers as a way of further diversifying the risk of the portfolio, thereby lessening the impact should any one insurance carrier become insolvent or otherwise unable to pay out on a policy. To ensure their investors that best practices are being followed, providers may submit to due diligence reviews once or twice annually. This ensures that all aspects of the transaction complies with state and federal laws surrounding life settlements, as well as internal procedures implemented to control legal exposure.

Diversification. The key to a portfolio that produces consistent results requires a substantial number of policies, typically more than 30. These will typically have a broad mix of diversity based on ages of the insureds, health concerns, life expectancies, policy face amounts, and the insurer’s credit rating. These will usually be within the goals of the specific portfolio, i.e. small policy portfolios, etc.

Calculating Longevity Longevity affects pricing, and providers base longevity figures on calculations from a number of reputable life expectancy providers recognized as medical underwriters and experts in understanding how long an individual will live in comparison to the United States population.

The Transaction Process. Life settlement providers typically conduct regular fraud reviews to determine the fairness of commission levels, transaction costs, and pricing. Actuaries are called in to validate pricing, and attorneys review all documents. Additionally, independent investigations are sometimes conducted to determine if the policy holder has an insurable interest in the insured.
Taxes. Life settlement providers will assess exactly what taxes apply to the death benefit. Proceeds of a settled life insurance policy are taxable.

Post-sale Service. Life settlement providers will typically use software to determine exact annual premium obligations. For efficiency, policy audits are performed regularly to detail if premium payments should be adjusted (usually annually). Providers will often appoint an independent, experienced body set up to take premium payments and to service settlement portfolios properly.
Fund Management. Who manages a fund is as important as how it’s managed. A life settlement provider is subject to state legislation and financial regulations of a reputable financial regulatory board. Manager are expected to have experience in investment management and management of life settlements.

Liquidation Strategy. Providers are required to make sure your fund has ample cash reserves to cover administrative costs, premium obligations, etc. Life settlement portfolios are illiquid in nature and must be held for a long period of time to realize the rates of return forecasted. A liquidation strategy is typically not a good exit strategy as life insurance policies as buyers will bid at rates far below the initial investment objectives of the portfolio.

Life settlements can serve as a tremendous liquidity alternative to lapsing or surrendering a policy. Understanding the process by which your life settlement provider operates helps you as an advisor and a client feel more secure in the transaction.

Located in Manhattan Beach, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)