What Are Life Settlements
A "life settlement" is the process of selling life insurance policies
to financial investors. This process - the transfer of legal ownership and beneficial
interest - may extend over several transactions and will certainly involve several
different parties, although it is only the initial "retail" sale from
the original owner that is subject to specific legislation and regulation.
Several reasons may render a life insurance policy surplus to requirements: a "life
event", such as the death of a spouse or dependent, or divorce; a change in
financial circumstances, such as a loss of income requiring the liquidation of one
or more capital assets or the availability of cheaper insurance elsewhere; or a
change in tax law, such as the suspension of inheritance tax in the United States
implemented by the first Bush administration. There are some excellent public policy
reasons why Western governments should support the development of this asset class
- the rapidly aging demographic profile in most Western countries requires that
new sources of income be developed to plug the expanding income gap between under-funded
pension plans and the increasing cost of medical care for seniors.
The phrase "life settlements" is used in two ways, first to identify the
process of selling life insurance policies to third party financial investors and
second to identify the life insurance policies which are the subject of those sales.
Legislation and regulation in the US usually follows the first definition, as it
is the procedures employed before, during and after a life settlement transaction
which attract attention from regulators. Market participants will frequently refer
to "trading life settlements" or "buying a portfolio of life settlements",
in which case the reference follows the second definition.