How Life Settlements Help Family Offices Meet Their Socially Responsible Investment Goals
Definition and First Impressions
A life settlement is the transfer of ownership and beneficiary rights of an unwanted and/ or unneeded life insurance policy in exchange for a cash payment. The seller of the policy generally no longer has the responsibility of paying future premiums – that is transferred to the investor. In exchange, the investor profits from the difference between the death benefit of the policy and acquisition, additional premium payments and administrative costs.
Most often, people focus on that last part: the investor benefits when the someone passes away. It can seem a bit morbid to some people. However, let’s instead focus on the time the policy is sold: who benefits then? The seller, of course. A deeper dive into the situations faced by many of these sellers helps to change the conversation.
Crises Facing Seniors Today
Sellers in the life settlement market are typically 70 years of age or older. As such, they are often facing one or more of the following societal crises:
1. Inadequate retirement savings
2. A need for expensive, long-term medical care
3. Poor alternatives for unwanted or unneeded life insurance policies
Crisis #1: The Retirement Deficit
There are myriad statistics proving that U.S senior are not saving enough for retirement, but one eye-opening example comes from Fidelity Investments. They recommend holding a minimum of 8x your annual salary in savings to use as income during retirement. Currently, about 80% of Americans have retirement savings of less than 1x their annual salary, and over 40% of Americans have no retirement savings whatsoever.
This means there are a lot of seniors searching for ways to reduce costs and/or increase income.
Crisis #2: Long-Term Care Costs
Long-term care includes a broad range of services that help with the basic activities of everyday living such as in-home care, assisted living, and nursing homes. As life expectancies have increased, larger numbers of seniors have experienced a need for such extended care. Spending on long-term care is expected to more than double from 1.3% of GDP to 3% by 2050 as demand and costs increase (2). The situation is exacerbated by the fact that Medicare does not cover long-term services such as these. It is no surprise then that medical costs are cited as the most frequent cause of personal bankruptcy for U.S. seniors.
Crisis #3: Life Insurance Options
Today, when an insured no longer wants or needs their life insurance policy, the insurance provider offers two options:
(i) stop paying premiums and allow the policy to lapse for no return, or
(ii) surrender the policy back to the carrier for the “cash surrender value”
Since 2008, life insurance policies with a combined face value of approximately $2.5 trillion dollars have been terminated prematurely (3). This is often because insurance premiums increase significantly later in life and become a financial burden, and because the insured isn’t aware of any other options.
Solution: Grow the Life Settlements Market to Promote Senior Financial Independence
Life settlements provide sellers with a more generous option for disposing of their life insurance. Life settlements on average pay 7-8x the cash surrender value of a policy, and they also offer more flexibility wherein – for example – the seller can still maintain a portion of the death benefit while reducing or eliminating their premium costs (4). Combined, these factors result in an incredible relief in the lives of individuals struggling to survive under the weight of their medical bills and retirement expenses.
By shifting focus towards the sellers of the policies and their motivation for doing so, it becomes clear that the existence of the life settlement market provides a societal benefit beyond what is offered by insurance carriers.
Given this background, family offices should consider how an investment in the market for life settlements helps to alleviate the economic distress on our senior population and provide them with financial independence.
About AIR Asset Management
AIR Asset Management (“AIRAM”) is a rapidly growing hedge fund management firm based in downtown Chicago. As an SEC-Registered Investment Advisor, AIRAM provides qualified investors with unique growth opportunities in longevity-linked investments such as life settlements, annuities and private credit. AIRAM’s objective as a firm is to offer attractive risk-adjusted returns that are largely uncorrelated to traditional asset classes and equity markets. AIRAM is also a strong believer in socially responsible investment strategies, and they promote these efforts through their voluntary membership in the Principles for Responsible Investment.
Qualified Purchasers interested in learning more should visit www.airassetmanagement.com OR email info@airassetmanagement.com for additional information.
Endnotes:
(1) The Retirement Savings Crisis: Is It Worse Than We Think? National Institute on Retirement Security, 2013.
(2) Dignity, Death and America’s Crisis In Elder Care. Time Magazine. Edwards, 2017.
(3) Saving Face: A Solution to the Hidden Crisis for Life Insurance Policyholders. Braun and others, 2019.
(4) Life Insurance Settlements: A Way to Give Back $8.8 Billion Annually to Seniors and the Economy. Mason Finance, 2018.
