to significant unfavourable fluctuations in the prices of
bonds and stocks.
Life insurance assets yield low risk to invested capital, as
life settlements can be acquired at a significant discount to
face value yielding a high cover ratio, exhibit potentially low
volatility as measurable mortality rates are stable for older
individuals across a broad pool and thus can provide solid
backing for the issuance of securities.
Prior to the development of the life settlement market,
policyholders wishing to dispose of a life insurance (asset)
policy, faced choices such as: surrendering the policy and
receiving the cash value; discontinuing premium payments
and thus allowing the policy to lapse in which case all policy
benefits could be lost; pursuing a reduced paid up insurance;
or non-forfeiture option under which benefits are reduced
when premium payments are not made or securing a policy
loan which is effectively borrowing against future benefits
and dividends.
Thus a life settlement is an attractive option to existing
policyholders, because they provide an active secondary
market for life insurance policies which gives the
policyholder flexibility to convert life insurance to a more
liquid asset. They also can help policyholders address
changes in estate planning requirements, allow policyholders
to secure a market price for a life insurance asset more
favourable than the illustrated cash value, present a means
of disposing of coverage no longer required under a corporate
owned life insurance program or even provide an option to
effectively terminate coverage no longer needed without
lapsing the policy.
Corporate Neutral
settlements, as with any other
For life
asset class where there
are potential rewards, there are key risk considerations that
should be carefully understood by investors. Most prominent,
is longevity risk, which is the risk that actual mortality
experience of the contracts may deviate from expected in
an unfavourable way. This exposure to longevity risk could
result in deferred recognition of gains, lower rates of return
and require that additional premium payments be made.
Liquidity risk, which is the risk that investors may not be
able to buy and sell life settlements in a well-functioning
market and the credit risk that the insurance company
issuing the policy may not have the financial wherewithal
to make good on their obligations should also be evaluated.
Are you getting enough return
from your Captive Manager?
It pays to explore captive management
provided by Beecher Carlson.
Beecher Carlson, 2012 Captive Manager of the Year, has
been helping clients explore and understand the many
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In addition, key risk related consideration, such as the
two year contestability period subsequent to issuance
of a life insurance policy under US regulation during
which the insurer may challenge the validity of a contract,
tax implications relating to the possible imposition of
withholding tax on non-US investors and general US
statutory regulation that may limit purchases or sales
of life settlement contracts should be considered by
investors as well.
In summary, life settlement contracts offer the potential
for stable attractive returns and predictable asset growth,
while simultaneously providing an opportunity for hedging
opportunities and diversification. While understanding this
unique asset class requires initiative and effort, as well as
knowledge and understanding of the key risk considerations,
the potential rewards are numerous and apparent.
T: +1 345 244-1660
E: [email protected]
W. www.cimoney.com.ky
www.beechercarlson.com
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