Benjamin Franklin quipped some 300 years ago that in this world nothing is certain but death and taxes. Today, a growing number of wholesale investors are heeding the first half of this observation, through an emerging product known as a life settlement fund. STEPHEN SHORE reports.
Life settlement funds purchase US life insurance policies from people who are typically over 65, and typically are expected to die in less than 10 years. Obtained at a heavy discount, the funds pay the remaining premiums on the policies until their ‘maturity’, whereupon the full face value of the policy is paid out by the insurer. Life settlement funds claim they can provide stable, high returns for investors, and offer an opportunity for people to unlock some of the equity tied up in an unwanted policy.
With the average surrender value of a life policy offered by the insurer being around 6 per cent of the face value, the average 30 per cent offered by a life settlement fund appears to be an attractive option for some elderly people. Selling life policies in the US became popular last year, according to Mark Todd, chief executive of Life Policies America, a California-based vendor of life settlement funds. “Prior to sub-prime, people just did reverse mortgages,” he says. “Following the housing downturn, people are now exploring new areas where equity can be released.”
Life settlements are now starting to gain traction in Australia as an alternative asset class. The Life Settlements Wholesale Fund, based in Queensland, is currently the only registered fund offering such a product to Australian investors. According to its manager of institutional business, Mark Brigden, the fund sources only US life insurance policies because of the greater market depth for high value policies, and a piece of US legislation known as the ‘non-contestability clause’ which makes American life policies a lot less risky.
Under that clause, once a policy has been held for two years, insurance companies in the US lose their contractual right to withhold payment if they discover that the policy holder was less than forthright in their initial disclosure of personal details. Therefore, a third party can purchase a two-year-old US policy secure in the knowledge that there’s little chance it won’t be honoured.
In Australia, insurance companies can check a customer’s information at any time and decide that the policy is invalid – even after a claim has been made. Property Investment Research (PIR), an independent research firm, calculates that, depending on tax rate, investors in the Life Settlements Wholesale Fund can expect after-tax returns of between 8.37 per cent and 11.55 per cent.