Annual volume from life settlements transactions is expected to reach $13 billion in face value over the next three years, according to research from Aite Group LLC.
That's a marked increase from the estimated scale of the business during 2009, as capital necessary to buy life insurance policies in the secondary market became constrained and more policies were available for sale, according to Aite's report, “Life Settlements: Technology and Service Providers.”
The research firm estimated that in 2009, life insurance policies with $8 billion in combined death benefits were settled. In typical cases, the insured individuals who sold their policies over the secondary market received offers equivalent to 18% to 20% of their death benefits.
While policyholders received $1.1 billion in payouts last year from selling their policies, brokers and providers also made money. Settlement providers raked in $160 million, while settlement brokers earned $240 million. Agents in the deals made $96 million.
Going into the future, the life settlements industry has a number of trump cards in its favor: Aging boomers may want to sell their policies to help cover other financial needs — such as long-term care. Meanwhile, institutional investors who buy up settlements can benefit from investments that aren't correlated with the equity and credit markets.
Still, challenges await the industry. For instance, the rates of return and the amount a client receives for the sale of his or her policy depend on life expectancy and the availability of capital — as well as the interest — among institutional buyers, according to Aite.
The research firm also pointed out that while industry optimists believe that in just a few years, it will be able to settle as much as $40 billion in policy face value, Aite Group believes that the life settlements securitization market will need to grow.
That would require a higher volume of life settlements to create a diversified pool and lower transaction costs so that individuals with small policies can sell their coverage. Investors will also need to buy more policies from younger people — those between 60 and 70 — which would require the industry to sharpen its life expectancy calculations, according to the report.
E-mail Darla Mercado at [email protected].
