Life Settlement Providers - How do they fit in?

For those outside of the life settlement industry the process of selling a life insurance policy would presumably be very straightforward. It conceivably starts with a senior that has an unwanted policy they would rather sell than let lapse or trade for the minimal cash surrender value. The senior enlists a life settlement broker who in turns brokers the best deal from a buyer, known as a life settlement provider. Ahhhhh if it were only that easy. In a very, very simplistic sense that is the overall flow of a life settlement transaction, but stops short of painting the whole picture. There are a number of additional layers and considerations that really affect the complexion of demand in the life settlement market.

To better understand why some policies are en vogue while others are not, one must really understand the complexities of the market. The motivated senior enlisting a broker themselves or via a trusted advisor such as a financial planner or insurance agent is accurate. However, it is the buy side that is really involved and complex. To start, buyers of life insurance policies (a.k.a. a life settlement) are for the most part entities that are licensed state by state to purchase policies from individuals, trusts and businesses. Life settlement providers, as they are known, are the actual buying operation of policies, but may not be the source of money to purchase the policies or even the final owner of the policy. They are there to find policies, then negotiate the sales price with the seller or the life settlement broker. The life settlement providers are in essence just acting as a buying agent for investment funds, financial institutions and other large pools of money that want to purchase life insurance policy investments. A good parallel is the real estate industry. If a life settlement broker is analogous to a home seller's agent, then the life settlement provider can be compared to the home buyer's agent. So the buy side part of the equation might look as follows:

Investors put money into an investment fund, which then has an obligation to invest their money and seek returns for them. Or an investment bank may have proprietary money to invest to generate earnings for their financial institution. In either case, they want to put their money to work in life settlements. So they contract a licensed life settlement provider to go out and purchase policies on their behalf. Then once the policy is purchased, the investment fund, investment bank or other financial institution that owns the policy may hold it until the person dies. They would then collect the death benefit and realize a return on their investment. However in many cases, the newly acquired policy is packaged with other policies and sold off as a portfolio to yet a different investment fund, investment bank, etc..

At the end of the day, it is the investor that is funding the purchases through the life settlement provider that is dictating the types and sizes of life insurance policies that they want to buy. These investors know best, what types of investments(i.e. life insurance policies) are best suited for their investment goals and purposes. Now admittedly some life settlement providers do use proprietary money to fund their own purchases. Hence they usually have more flexibility in the types of policies they solicit since they aren't simply performing a contracted service for an investment fund. However, they may still have to consider a possible goal of packaging policies together for sale as a portfolio. Or they may have gone out and raised their own capital to purchase policies and have to consider their own investor's goals.

In my next post, I will discuss how these market influences are shaping the life settlement industry appetite and what types of policies are currently in the highest demand.