Introduction to Life Settlements

Case Solution

Alexander Braun, Lauren H. Cohen, Christopher J. Malloy, Jiahua Xu
Harvard Business School ()

Life insurance is an asset that belongs to the majority of American adults (61%). Note that this 61% penetration rate is essentially on par with home ownership (64%) and higher than that of 401 (k) retirement accounts (53%). Life insurance or life insurance contracts allow people to sell their life insurance policy in a secondary market. Life insurance is a negotiable asset, for many people possibly the most valuable in their portfolio after real estate and perhaps a retirement account. However, the general public knows little about the policy being negotiable. By handing over a policy to the insurance company, the policyholder often suffers a considerable discount on the economic value. At the same time, the insurer retains the difference between the economic value of the policy and the surrender value. When selling a policy on the secondary market, on the other hand, it is common to command a price well above the salvage value. Therefore, life settlements allow policyholders to capture a much larger, if not total, part of the economic value of their contracts. In this industry note we present the basic structure of the market, the important players and the economic fundamentals. We also look for possible ways to maximize returns in this market for both investors and policyholders.

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