High-net-worth insurance customers are increasingly selling their life insurance policies to third parties, and a research firm says this practice will become one more option needed in a comprehensive financial services menu as the population ages.
Some private banks are giving high-net-worth clients the option of selling their life insurance, according to a company that arranges such transactions. However, banks and other financial services providers that offer these "life settlements" should be wary of potential regulatory scrutiny, some analysts warned.
The life settlement industry is expected to grow more than tenfold, to $160 billion of insurance face value, by 2030, according to a June report by Bernstein Research, a division of New York-based Sanford C. Bernstein & Co. The business comprises $13 billion of death benefits today, the report said.
Settlement companies buy life insurance policies from people who no longer want or need them. The companies ultimately collect the death benefit and pass it on to a third-party investor, such as a hedge fund.
Hedge funds and other investment vehicles sometimes buy life insurance policies in an effort to spread risk by generating returns not correlated with the equity markets.
Many high-net-worth investors sell their life insurance policies because they no longer need the income protection, said Larry Simon, the president of Life Settlement Solutions in San Diego.
"For high-net-worth investors in their late 70s, they may have had major changes in their estate planning since they originally took out the insurance," Mr. Simon said. "They may not need that much insurance, and they don't want to keep paying the premiums.
As life expectancy increases, many investors also find that they no longer need to provide financially for dependents, he added.
Some large private banks began offering life settlements to wealthy clients in the past two or three years, Mr. Simon said. He would not name the banks, however.
One driver of growth in the life settlement industry is the rapid expansion of the target market, people older than 65, according to the Bernstein report. This segment is growing more than three times as fast as the U.S. population overall, the study said.
More than 96% of people who sell their life insurance policies are older than 65, the report said, and the life expectancy of most of them is four to 10 years.
The Bush administration's drive to eliminate the estate tax has also boosted the life settlement industry, according to the report. In the past, some affluent investors bought survivorship life insurance to help their heirs fund the estate tax payment.
Financial advisers' tighter focus on fiduciary responsibility as a result of regulatory pressures may also be a boon to the life settlement industry, the Bernstein report said. Advisers may feel obliged to offer life settlements as an option among comprehensive financial planning services, the study said.
But the report cautioned that the life settlement market may be subject to regulatory scrutiny because life settlement returns are tied to life expectancy. Advisers may be required to disclose that a third party will benefit from the policyholder's death, Bernstein said.
Banks and advisers need to ensure that they are carefully evaluating clients' financial needs to determine whether a life settlement is appropriate, said Carmen Effron, the president of the CF Effron Co. bank insurance consulting firm in Westport, Conn.
"Some people need life insurance protection because they have no other assets," Ms. Effron said. "But the settlements may be appropriate if you no longer need the insurance, particularly for wealthy investors."
The Bernstein report noted the similarities of life settlements to viatical settlements - the sale of life insurance policies by people with terminal illnesses. Since the 1980s, state and federal regulators have penalized many viatical companies for using aggressive marketing tactics.
