WHO IS BUYING MY POLICY?
One of the most commonly asked questions in the secondary insurance market is who is buying my policy. All insured's have a right to know, that when they sell their life insurance policy who is going to gain from their death. In America, all buys of insurance policies must be institutional in nature. A life settlement investor must be a qualified institutional buyer as defined in the federal Securities Act of 1933. A qualified institutional buyer (QIB) is defined under Regulation D, Rule 144A as an entity owning and investing large amounts of securities, with the threshold ranging from $10 million to $100 million of securities not affiliated with the entity and dependent on the type of entity.
Every secondary insurance transaction includes the provider and the money source. The life settlement provider is the entity that enters into the transaction with the policyowner and pays the policyowner when the life settlement transaction closes. The money source or investor is the actual bank or hedge fund that puts up the capital to purchase the policies. The provider works with agents and brokers to buy policies for the investor. They work together to create parameters by which the provider must follow to buy the policies, however if the policy falls into the range of those parameters the provider has the purchase power.
In addition to purchasing the policies for the investor, the provider will also service the policies. They will pay the continued premiums, will collect the death benefit upon the death of the insured and will do all other tasks the insurance carrier requests to keep the policy inforce. The provider also acts as a "Chinese Wall" or barrier between the insured and the investor. The investor only sees numbers on a paper, they never see the same, address or social security number of the insured. The barrier gives the client a piece of mind that they will not be hunted or followed after they sell their policy. Their policy goes into a pool with hundreds, if not thousands of other policies, to be serviced for the life of the policy. This lifetime servicing is called a traveling covenant.
Today, the largest investors in the secondary insurance market are Credit-Suisse, Deutsche Bank, AIG (American International Group), JP Morgan Chase, and many other banks and hedge funds. These institutional investors found that life insurance policies are a great alternate investment source, usually showing returns of between 8-12% on their money annually. With the recent mortgage crunch more and more investors are buying insurance policies which also serve to hedge against their mortgage losses.
However, not all investors in the secondary insurance market are institutional in nature. It is important that all insured's ask their agent or broker for written information on who the investor actually is and whether or not they use a third party provider that has a traveling covenant. Make sure that the broker and provider you use are member of the Life Insurance Settlement Association (LISA). All providers that are members of LISA are institutional in nature and all brokers have done their due diligence to identify only institutional investors to work with. As the industry continues to grow, the non-institutional buyers are quickly getting pushed out of the industry. However, all insureds should ask the important questions I have mentioned above and should your agent or broker not be able to answer them you can go to this website for a list of active members of LISA.