Life Settlement Infographic

Insights
Written By Taylor Colby

The birth of a new asset class

 

What is a life settlement?

When a policyholder sells a life insurance policy that's no longer wanted, no longer needed, or no longer affordable. The owner gets a cash payment that exceeds the policy’s surrender value offered by the insurance carrier and has no on-going responsibility to pay future premiums. The buyer typically holds the policy until maturity (death of insured) and receives the benefit payable from the insurance company.

Life Settlements Pay More than The Cash Surrender

Life settlements are on their way to being a mainstream financial option...

90% of life insurance policies (by face amount) that are terminated are either lapsed or surrendered.(2)

80% of the holders of the lapsed policies receive nothing in return even after years of premium payments.

Growth of the mark = Investment Opportunity

$170B net market potential in 2019-2028.(3)

Market growth fueled by the aging U.S. baby boomer population that's turning to life settlements for income to pay for retirement and long-term care.

The case for life settlement investing

Low Volatility + Diversificaiton

An investment in life settlements offers an excellent way to diversify any portfolio and serves asa great defensive strategy since the return is generally not affected by traditional factors, stock market volatility, or interest rate fluctuations.

 
Life Settlements Efficient Frontier
 

Strong risk adjusted returns

life settlements have posted attractive returns

With stock market valuations near record levels and real bond yields below zero, the central premise of life settlements — an asset class capable of producing double-digit annual returns with low correlation to traditional financial investments — is more relevant and appealing than ever. 

“When comparing traditional asset classes against the AA Partners Life Settlement Index, it is clear that life settlements have a near zero correlation to the returns of mainstream financial markets.”
— Jose Garcia, AIR Asset Management Strategic Partner & Founder & CEO of Carlisle Management Company

A socially responsible investment

Investing in life settlements is a meaningful way to support the physical and financial wellbeing of U.S. senior citizens as they seek support for retirement or medical expenses. This is especially true for those who hold smaller-face value policies as they are more financially vulnerable. 

Annual dollar amount children pay for care for aging parents

Additionally, life settlement proceeds may ease the burden on adult children who contribute to caring for an aging parent and taxpayer-funded entitlement programs, like Medicare and Medicaid. 

A meaningful investment: life settlements

The life settlement asset class provides investors a way to make a positive, tangible impact on society. Here, we explain how life settlement investments positively impact senior citizens by providing needed liquidity using real world examples.

AIR Asset Management’s longevity-based strategy

Want to learn more about AIR Asset Management’s approach to investing in the life settlement market? Request more materials from our team.

SOURCES

1. Milliam USA and The Deal.com League Tables. Top life Settlement Providers for 2018.

2. American Council of Life Insurers - "Life Insurers Fact Book"

3. Conning & Co, 2019

4. Carlisle Management Company Internal Data, as of 12/31/2020

5. Life Settlements return and volatility were calculated by AIR Asset Management using a composite of 10 U.S. life settlement strategies. Notes: Return estimates are total nominal returns. Long-term volatility assumptions were used via factor exposures, historical volatilities, and correlations over the past 10 years. The historical volatilities and current factor makeup of each asset class was used to arrive at forward-looking assumptions. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Further information regarding composite Index available upon request.

6. AA Partners Life Settlement Index. Returns are net of fees.

7. Estimates of retirement adequacy in different cohorts of the population from Brown, Saad-Lessler, and Oakley (2018), Retirement in America: Out of Reach for Working Americans? National Institute on Retirement Security.

8. Deloitte

DISCLOSURES

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. No assurance can be given that any investment will achieve its objectives or avoid losses. Unless apparent from context, all statements herein represent AIR Asset Management’s opinion. This material is provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This information are not intended to provide investment, tax, or legal advice.

Illustrative Purposes Only:

Examples of our processes and any other ideas presented herein are for illustrative purposes only. There is no guarantee that the Fund will acquire a position in an issuer or industry referenced in such examples or ideas or that any such position would be profitable.

Indices

References to indices contained herein are therefore not intended to compare to the actual performance of the fund, but solely for the purpose of comparison to certain industry segments.

AIRAM Life Settlements Index: Life Settlements return and volatility were calculated by AIR Asset Management using a composite of 10 U.S. life settlement strategies. Notes: Return estimates are total nominal returns. Long-term volatility assumptions were used via factor exposures, historical volatilities, and correlations over the past 10 years. The historical volatilities and current factor makeup of each asset class was used to arrive at forward-looking assumptions. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted.

Risk Overview:

Management of Operational Risk- In the normal course of business, AIRAM life-settlement funds may be exposed to a variety of operational risks, including position pricing and Net Asset Value calculation procedures, client reporting procedures, compliance controls, and policy acquisition sources. Our managers seek to manage these risks by employing experienced service providers and management who report and manage in accordance with the investment objectives of each fund as outlined in its prospectus. Our approach is to hire the most experienced professionals and firms to add value and protection to our investors.

Longevity Risk- When evaluating the value of life settlements, each policy must be reviewed for multiple quantitative aspects of the insured and their health to get a firm handle on the probability of death over a given timeframe. Understanding the broader implications of these small details within a life settlement transaction is important. One of the key pieces of data used during the underwriting process is the medical underwriting report, which is performed by an independent medical underwriter. Utilizing the latest mortality information, premium data, mortality tables, and verification of coverage, an asset profile is developed and a valuation is produced by an independent valuation agent. A thorough review should then be conducted by a number of parties to create redundancy, and a detailed checklist utilized to ensure uniformity such that all criteria and regulatory requirements correspond to accurate underwriting and quality standards.

Liquidity Risk- Liquidity risk is the risk that a fund may not be able to settle or meet its obligations on time. Investment vehicles are traditionally exposed to quarterly and annual cash redemptions of units at specified amounts. Liquidity risk is managed by investing the majority of the Fund’s assets in investments that can be readily disposed of through various life settlement firms and exchanges. AIRAM utilizes marked-to-market accounting practices within its assets that provide quotations to its fund managers on a regular basis ensuring proper valuations are maintained.

Forward-Looking Statements: Certain information contained in this material constitutes forward-looking statements, which can be identified by the use of forward-looking terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due to various risks and uncertainties, actual events or results or the actual performance of the AIRAM funds may differ materially from those reflected or contemplated in such forward-looking statements.

Life Settlement Infographic
Taylor Colby
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