Life settlement investing in today’s market place can be a good reason to lend a wary eye since there are so many variables. But who stands to lose when the variables change?
It is no secret that life settlement funders use a variety of methods to determine the value of a life insurance policy. However, a number of items have been the backbone of pricing, such as the life expectancy reports and the in force illustration from the issuing life insurance carrier. In this report, we will review the variables of the life expectancy reports and how they affect the investment of a life insurance policy.
Many life expectancy providers use, at least in part, the Commissioner’s Standard Ordinary (CSO) table to determine life expectancy. In 2009, most providers changed from the 1980 CSO to the 2001 CSO, which showed a slight increase in life expectancy. Because of this, some life expectancy providers changed their projected life expectancy by as much as 30%. Since the life expectancy reports are, for the most part, the gold standard for pricing, many life insurance policies that qualified for settlement no longer qualified.
This shows that life settlement investing is not without its risks. Imagine for a moment that as an investor, you just purchased a block of policies. In addition to the purchase price, you also have to pay the ongoing premium to keep the policies in force. You planned your investment based on the projected life expectancy of the insureds, but now that the deal is done, you find out that you have to pay for the policies 30% longer. Is it still a good investment? Or do you look for an open window on the top floor of your office building to jump from?
That is the situation that many life settlement investors found themselves in in 2009, not to mention the collapse of the financial markets where money sources dried up almost overnight. Life settlement investing can be highly speculative at best, but there is one thing that is not a variable: people with life insurance policies die. It is just the “when” that is the variable.
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