Fed Action Related To Life Settlements?

This is an interesting piece about the signifigance of the Federal Reserve to life settlements. It is part of an obvious PR blitz by LPI, but food for thought nonetheless.

WACO, Texas, Nov 16, 2010 (BUSINESS WIRE) -- The Federal Reserve recently announced that it would move ahead with its plan to buy an additional $600 billion of U.S. Treasurys, an act widely viewed as an effort to spark the nation's economy. With short term interest rates at nearly zero -- and few other available tools at its disposal -- the Fed decided to effectively "flood" money into our economy. Whether the move will achieve its intended objective remains to be seen. What is apparent is that the financial markets offer no clear paths. To combat this, many investors are adopting multi-faceted strategies to hedge against risk, volatility, or meager returns and are seeking alternative, non-correlated investments like life settlements.

A life settlement is the purchase of an existing life insurance policy from an elderly policy holder at a discount to its face value. The transaction is used by wealthy seniors, who have large and expensive policies they no longer need, to extract value from an otherwise illiquid asset. Investors are attracted to life settlements because returns are not based on unknown future market performance (as with the stock, bond or real-estate markets), but on a known discount to a stated face value, which is quantifiable over a variety of time periods.

Life settlements are priced to yield around a 3% compounded return over a ten-year period, but can yield around 10-12% if the policy matures in five years. Yields increase even more if the policy matures earlier than five years. Because of this superior return potential and lack of correlation to financial markets, life settlements are becoming increasingly attractive to qualified purchasers.

Read rest of article at Marketwatch

NY Times Doesn't Understand Life Settlements

A recent article in the NY Times, titled Raising Cash From the Less Usual Places, seemingly tries to do a fair and balanced look at ways to pay for elder related expenses. They of course touch on life settlements. However, my gripe is this, to the uneducated life settlements are portrayed and understood to be a tool for desperate seniors who have nothing else to sell.

Life settlements have helped numerous seniors out of tough spots, prevented foreclosures and wiped out crippling debt. But for every down on their luck senior who sold a policy, there are 10 others who were affluent or even down right wealthy when they sold their life insurance policy.

As much as life settlements are depicted as a strategy for the needy, they are really a wealth or estate strategy. Consider this, the average life settlement is for a life insurance policy with a $1.7million face, while the average in force policy is less than $350k. There are some ancillary considerations for this discrepancy, but at the end of the day, rich people are selling policies not poor people.

So while reporters and misinformed politicians are reminding everyone that your food stamp eligibility might be affected if you sell your policy, the rich keep selling their policies like just another asset. So please save us the sob story about poor grandma who was broke and someone took advantage of her to buy a life insurance policy on the cheap. If Grandma was really broke, chances are she stopped paying her premiums long ago.