Traded Life Policies
Encyclopedia
Traded Life Policies are United States
-issued, whole-of-life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime. The transaction by which an existing life insurance policy is sold to third parties is known as a life settlement
and traded settlement. The life assured is almost invariably 65 or over while life expectancy can be estimated using population mortality statistics and evidence of the assured’s health.
Holders of life policies might wish to sell before maturity for a number of reasons. It may be that they no longer wish to pay the premiums, or they might need the cash for purposes such as paying for care or charitable purposes.
The new owners continue to pay the premiums on the policies until they mature i.e. when the lives assured end, and they receive the payouts. This concept of a secondary market for life insurance policies is far from new. A market for Traded Endowment Policies (or TEPs) has existed in the UK for many years. It exists because policyholders can get a better price for their policies on the open market
than by surrendering them to the insurance companies that issue them. Even so, investors can still buy them at deep discounts from their expected maturity values. So much so, they have become a niche asset class for both institutions and private investors, to the extent that there are even mutual funds that invest in them.
Recent research conducted by boutique fund manager Managing Partners Limited
(MPL) revealed that familiarity with Traded Life Policies has steadily increased among Independent Financial Adviser
s (IFAs) over the last two years. According to MPL's findings, 78% of IFAs are now familiar with them as investment products. This is compared to 74% familiar with them in 2008 and 70% the year before - an increase of 8% over 24 months.
. A large number of people needed cash to pay for their care and a substantial market developed to meet those needs. TLPs sold on lives assured that have been designated as having a terminal illness
or to be in terminal decline, with a perceived life expectancy of less than three years, are known as viatical settlement
s and these were the main type of policies traded in the initial stages of the market. Broker
s would offer policyholders prices and find buyers, or ‘funders’. These funders were primarily private individuals, aligned with finance companies.
Many of the AIDS-related policies proved to be a bad investment as life expectancy
estimates were notoriously unreliable, due to the advent of new drugs that extended life expectancy. ‘Viaticals’ are still perceived as risky investments and the market has now gravitated towards senior life policies (over-65s), where life expectancy opinions are much more accurate.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
-issued, whole-of-life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime. The transaction by which an existing life insurance policy is sold to third parties is known as a life settlement
Life settlement
A life settlement is a financial transaction in which the owner of a life insurance policysells an unneeded policy to a third party for more than its cash value and less than its face value. Until recently, if a policyowner opted out of a policy by surrendering the policy or allowing it to lapse,...
and traded settlement. The life assured is almost invariably 65 or over while life expectancy can be estimated using population mortality statistics and evidence of the assured’s health.
Holders of life policies might wish to sell before maturity for a number of reasons. It may be that they no longer wish to pay the premiums, or they might need the cash for purposes such as paying for care or charitable purposes.
The new owners continue to pay the premiums on the policies until they mature i.e. when the lives assured end, and they receive the payouts. This concept of a secondary market for life insurance policies is far from new. A market for Traded Endowment Policies (or TEPs) has existed in the UK for many years. It exists because policyholders can get a better price for their policies on the open market
Open market
The term open market is used generally to refer to a situation close to free trade and in a more specific technical sense to interbank trade in securities.-Use of the term in economic theory:...
than by surrendering them to the insurance companies that issue them. Even so, investors can still buy them at deep discounts from their expected maturity values. So much so, they have become a niche asset class for both institutions and private investors, to the extent that there are even mutual funds that invest in them.
Recent research conducted by boutique fund manager Managing Partners Limited
Managing Partners Limited
Managing Partners Limited is a multi-disciplined investment house that focuses on managing alternative asset classes. MPL is in the field of traded policy funds , whole-of-life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their...
(MPL) revealed that familiarity with Traded Life Policies has steadily increased among Independent Financial Adviser
Independent Financial Adviser
Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market...
s (IFAs) over the last two years. According to MPL's findings, 78% of IFAs are now familiar with them as investment products. This is compared to 74% familiar with them in 2008 and 70% the year before - an increase of 8% over 24 months.
History
The market for TLPs started to grow rapidly as a result of the AIDS pandemic in the 1980sAIDS pandemic
The acquired immune deficiency syndrome pandemic is a widespread disease caused by the human immunodeficiency virus .Since AIDS was first recognized in 1981, it has led to the deaths of more than 25 million people, making it one of the most destructive diseases in recorded history.Despite recent...
. A large number of people needed cash to pay for their care and a substantial market developed to meet those needs. TLPs sold on lives assured that have been designated as having a terminal illness
Terminal illness
Terminal illness is a medical term popularized in the 20th century to describe a disease that cannot be cured or adequately treated and that is reasonably expected to result in the death of the patient within a short period of time. This term is more commonly used for progressive diseases such as...
or to be in terminal decline, with a perceived life expectancy of less than three years, are known as viatical settlement
Viatical settlement
A viatical settlement is the sale of a life insurance policy by the policy owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash...
s and these were the main type of policies traded in the initial stages of the market. Broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
s would offer policyholders prices and find buyers, or ‘funders’. These funders were primarily private individuals, aligned with finance companies.
Many of the AIDS-related policies proved to be a bad investment as life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
estimates were notoriously unreliable, due to the advent of new drugs that extended life expectancy. ‘Viaticals’ are still perceived as risky investments and the market has now gravitated towards senior life policies (over-65s), where life expectancy opinions are much more accurate.
Additional references in the media
- CityWire, "Traded life policies are controversial, but they are proving their worth in the crunch"
- Investment & Pensions Europe, "Longevity risk higher on TLP derivatives - MPL"
- The Times OnlineThe TimesThe Times is a British daily national newspaper, first published in London in 1785 under the title The Daily Universal Register . The Times and its sister paper The Sunday Times are published by Times Newspapers Limited, a subsidiary since 1981 of News International...
"Top tips for saving in a slump"