The owner of a life insurance policy usually receives substantially more when selling the policy in the secondary market than the surrender value offered by the insurance company.
While the insurance company calculates the surrender value on the basis of statistical tables of the whole population and deducts surrender charges, in the secondary markets policy holders are assessed individually on the basis of their age, health and individual life expectancy. Using this individualized approach it is possible that the insured person is paid substantially more in the secondary market than the surrender value calculated by the particular insurance company.
Life settlements are a safe asset class since the face values of insurance contracts are irrevocable payment obligations of well-rated major US insurance companies (average rating A+ by AM Best).
- Returns are largely uncorrelated to traditional financial investments, real estate or hedge fund strategies. The returns only depend on the point in time when the face value is paid out.
- Due to the fact that life settlements are pure risk policies, the final payment is known, allowing for an actuarial assessment of policies.
- The market is (still) inefficient.
- The US market is the largest life settlement market.