A life settlement is a contract pursuant to which an individual, usually 70 years of age or older, who owns a life insurance policy (and is generally also insured there under) sells the policy together with rights to receive and collect all death benefit proceeds from the policy that was sold. There are a wide variety of personal reasons for the sale by an owner of the policy including:
- The yearly premiums are no longer affordable
- The policy owner has multiple policies and wishes to eliminate one or more
- The policy owner wishes to replace the policy with a different type of policy such as long-term care
- The policy owner requires funds for medical care
- The policy owner wishes to maintain a desired standard of living
- The policy owner wishes to remove the policy from a trust or estate
The life settlements market is usually referred to as a secondary market for life insurance policies, most typically Universal Life. The life settlements market has increased from approximately $50 million in transactions in 1990 to a reported $4 billion in transactions in 2002. In a study done by The Wharton School of Business in 2002 it was projected that transaction volume would reach $18 billion in 2006. Industry estimates call for an increase to a potential of $30 billion per year by the end of this decade.
As the secondary market completes a decade of steady expansion, the number of financial professionals which include wealth advisors, insurance agents and Certified Public Accountants engaging in life settlement transactions continues to grow. Likewise, the number of persons reaching 65 and older is estimated to grow by more than 20% from 2000 to 2010 according to the United States Census Bureau, which, when linked to broader awareness by professional advisors should increase the number of available policies each year. These professional advisors generally are the starting point for an individual to sell a policy in the secondary market. Aggregators of policies provide bids for the insured to consider through these professional advisors and, if accepted, the aggregator purchases the policy for resale in the marketplace.
CDOC purchases the insurance assets it uses for securitized products from various third party aggregators. CDOC has a proprietary network of trusted aggregators from which it purchases policies. Typically, CDOC will have a fixed price contract with each aggregator that provides the conditions of purchase. CDOC uses stringent requirements for all policies purchased including the requirement that the aggregator use CDOC proprietary paperwork for the original purchase from the insured. Aggregators receive a flat price for each policy and must provide required services at their sole expense. CDOC requires aggregators to evaluate each of the following criteria before purchase by the aggregator and ultimately by CDOC.
CDOC performs the following functions before and/or after acquisition:
Should a policy not meet the CDOC strict criteria it will not be acquired by CDOC. Additionally, thorough statistical analysis of groups of policies is performed by CDOC. While CDOC maintains a minimum rating level for issuing insurance carriers, it is important to note that life insurance policies are unilaterally enforceable and are primary obligations of the issuer, taking priority over most other obligations. CDOC is not aware of any legitimate carrier in the United States that has failed to pay a death benefit on a currently paid policy.
CDOC further protects purchased policies by using best of breed industry practices for the servicing of acquired policies. CDOC uses third party experts for the tracking and location of the insured, analysis of premium payment requirements on serviced policies, to determine the most advantageous structure, amount and timing of premium payments, arranging the payment of premiums and the coordination of the collection of insurance proceeds. Finally, CDOC uses independent third party escrow agents and trust companies to hold all investor balances and policy assets underlying its’ securitized instruments until contractual distribution.
The use of independent third party experts ensures the integrity of each investment instrument created by CDOC.
