For example, a series of case studies from a major US broker shows that the amount a policy can fetch on the life settlement market can be as much as 40 times its cash surrender value. The individuals underlying the life settlements in Stephen Knott’s fund have an average age of 80, all of which have been purchased since the Fund’s inception two years ago, and he confirms that some individuals have been paid as much as 40 per cent of the face value of their policy to transfer them, while the average cash surrender value is more like 5 per cent. The broking side of the industry has also been cleaned up, Fishbaum contends, with investment banks driving many of the reforms. “The relationship between an investment bank and a person selling a policy is a retail transaction, so they have a reputation to protect.

The industry standard now is that brokers have to say how much compensation they are getting, and the beneficiaries of the individual’s policy being sold have to be notified and not object,” Fishbaum says, adding he knows of several brokers who have been blacklisted by institutional buyers of life settlements for failing to uphold appropriate standards. Fishbaum’s advice to institutional investors in life settlements is to emphasise the social benefits brought by the market. “This is plainly not about ripping off grandmothers. Many people take out life insurance when they are starting a family, for example, but then their children grow up and move out, they might retire from full-time work, they might have medical bills – in short, their circumstances change, and continuing to pay the premiums on a life policy may not best suit their needs,” Fishbaum says.

Knott also dismisses the mainstream media’s tendency to portray life settlements as somehow preying on the elderly and vulnerable. “The average face value of a policy in our portfolio is $US4 million. They’re often entrepreneurs who’ve had to take out life insurance as part of a ‘key man’ clause with their financiers. They go to the meeting with the [life settlement] broker accompanied by their lawyer, they’ve come to do business.” The life settlements market can be accessed through products which directly own a group of policies, at least 200 but typically more than 300 according to Fishbaum – as mentioned, Life Settlements’ fund has 570 – although investment bank entrants have instead offered derivative swaps which reference the market. Investors pay an upfront fee and an annual charge towards the cost of purchasing and then ‘maintaining’ (ie paying the premiums on) the policies, and Fishbaum argues that a swap reduces the impact of fraud related to any particular policy, or the cost of insurance increasing.

Leave a comment