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Traded Life Policies | Life Settlements Traded Life Policies (or TLPs) are United States-issued, whole-of-life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime. The transaction by which an existing life insurance policy is sold to third parties is known as a life settlement and traded settlement. The life assured is almost invariably 65 or over while life expectancy can be estimated using population mortality statistics and evidence of the assured’s health. Holders of life policies might wish to sell before maturity for a number of reasons. It may be that they no longer wish to pay the premiums, or they might need the cash for purposes such as paying for care or charitable purposes. The new owners continue to pay the premiums on the policies until they mature i.e. when the lives assured end, and they receive the payouts. This concept of a secondary market for life insurance policies is far from new. A market for Traded Endowment Policies (or TEPs) has existed in the UK for many years. It exists because policyholders can get a better price for their policies on the open market than by surrendering them to the insurance companies that issue them. Even so, investors can still buy them at deep discounts from their expected maturity values. So much so, they have become a niche asset class for both institutions and private investors, to the extent that there are even mutual funds that invest in them. History of Life Settlements The first life settlement transaction can be traced back to the early part of the 20th century when a surgeon in the United States agreed to buy a life insurance policy belonging to one of his patients. John C. Burchard was in need of funds to pay for his surgery and offered to sell his insurance policy to Dr. Grigsby in exchange for $100 and an agreement to pay all remaining premiums. Following Burchard’s death a year later, the executor of his estate, R.L. Russel, challenged the transaction and Grigsby’s claim to the benefits of the policy in court. The case of Grigsby v Russell eventually reached the US Supreme Court in 1911 where it was established that a life insurance policy was considered to be an asset that the policy owner may transfer without limitation. In the landmark ruling, Justice Oliver Wendell Holmes noted that “life insurance has become in our days one of the best recognised forms of investment and self-compelled saving”. As a result of this decision a policy could be transferred into the name of another person and a number of specific legal rights became attached to it. These included among others the ability to use the policy as collateral for a loan, change the name of the beneficiary and sell the policy to another party. This fundamental principle would subsequently allow the viatical and life settlement industries to emerge, however this did not happen until eighty years later when the onset of the AIDS epidemic sparked a flurry of transactions because of the inherent short life expectancies that were faced by the victims of the disease. As advances in medicine took place and people with AIDS started to live longer, viatical settlements became less profitable and an industry trading in life settlements policies arose. More recent US Court decisions have further reinforced the rights of an insured party to appoint a beneficiary and transfer the policy any time after it has been issued, regardless of whether the new policy owner has an insurable interest or not. Since 1911 the life settlements market has continued to evolve and improve. Nowadays policies are traded in a highly regulated and transparent way, benefiting both the buyer and the seller of a policy. The market is now dominated by institutional investors and increased sophistication has allowed for a number of financial tools and instruments to become available enabling asset managers to deliver investment vehicles that can achieve extremely smooth, predictable investment returns. |
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