Life Settlements: An Attractive Alternative Investment

Overview

Clarion believes that the low volatility and relatively high returns of transferrable life insurance policies, the purchase of which are called "life settlements," represent an attractive alternative to fixed income or other traditional, low-risk, stable return products.

Investment Advantages

Clarion believes the fundamental reasons life settlements represent a comparatively attractive asset class in the current market are:
High Returns: Current market dislocations related to reduced buy-side capacity should allow strong returns on an unlevered basis;
Low Volatility: A statistically significant, diversified pool should exhibit low volatility in returns – with standard deviations within 2% – thereby producing attractive returns even under stressed scenarios; and
Uncorrelated Yields: Asset class returns are driven mainly by mortality trends with little correlation to the economy or other financial assets.

What is a life settlement?

At its most fundamental level, life settlement investing means purchasing life insurance policies from owners who no longer wish to own and pay premiums on his or her policy. The desirability of owning a whole or universal life insurance policy often changes over time, especially given the ongoing obligation to pay high premiums, and owners wishing to cash out of their policies have historically only had the often-unattractive option of surrendering their policy back to the insurance company in exchange for a relatively small payment compared to the premiums the owner had paid into the policy. Life settlement investors, however, generally pay owners significantly more than the cash surrender value offered by insurance companies but below the policy’s face value. The purchaser then holds the policy, continuing to pay the premiums and management costs, ultimately collecting the policy’s death benefit. Thus, life settlements generate investor returns while providing a valuable source of liquidity for assets in which consumers have significant investments and consititute a meaningful component of their estates.