The Wall Street Journal


May 31, 2005









Recognizing Life Insurance's Value

Study Says Keeping a Policy
May Mean a Bigger Payoff
Than Selling to an Investor

May 31, 2005; Page D2

Keeping a life-insurance policy is often a better bet than selling a policy to an investor or surrendering it, according to a new study.

The report, conducted by researchers at Deloitte Consulting LLP and the University of Connecticut, analyzes the burgeoning life-settlement industry, the secondary market for life-insurance policies. In a life-settlement transaction, a policyholder sells a life-insurance policy to a third party, typically an institutional investor, which takes over the premiums for the policy and reaps the payout when the seller dies.

The study examined the value of selling a life-insurance policy, compared with two other options: keeping a life-insurance policy until death or surrendering a policy and collecting the cash surrender value, the amount an insurer pays when you surrender the policy. The study, which was funded by several insurers, including MassMutual Financial Group, focused on older policyholders with some health impairments, which the researchers say is the typical target market for life settlements. The study found that if these policyholders want to maximize their estates for heirs or a charity, it is generally best to keep their policies. That is because selling a life-insurance contract has high transaction costs to both the seller and buyer -- including commissions and taxes -- that bite into a policy's value, the study said.

The report suggests that if a policyholder needs cash, it is smarter to sell another asset, such as securities, rather than an insurance policy. For the majority of policyholders with impaired health, "the greatest economic value results from retaining the contract until death," the researchers wrote.

However, the researchers also found that for these insured people, selling a policy to an investor will be more lucrative than surrendering a policy.

The study examined 534 life-settlement contracts filed with the New York Department of Insurance from 2000 to 2003, with a total face amount of about $267.5 million. They found that life-settlement companies, on average, paid only 20% of the face amount of an insurance policy. By contrast, the "intrinsic economic value of the policy" -- the estimated future payout minus future premium costs -- was an estimated 64% of the policy's face amount.

To be sure, some insurers have had concerns about the life-settlement industry for a variety of reasons, including whether the secondary market could affect how many policies lapse and how policies are priced.

Life settlements are typically aimed at people over age 65, with policies of at least $250,000, and who have some health problems and a life expectancy from two to 15 years. The transactions can be attractive for policyholders who might not have the means to pay future premiums nor the desire to do so if, for example, all their beneficiaries have passed away. Life-settlement companies might pay anywhere from four to eight times the cash surrender value for an insurance policy, says Alan Buerger, the chief executive of Coventry First, a Fort Washington, Pa., life-settlement firm.

Selling an insurance policy frees up cash for current needs, such as pricey long-term-care insurance, especially if the policyholder doesn't have other assets that can be easily liquidated to pay the premiums.

Every individual's situation is different, and in real life, some people don't keep their policies and instead end up letting them lapse. "The secondary market gives another option," says Mr. Buerger. Coventry First funded its own examination of the Deloitte-UConn study, by consultant Hal J. Singer and Neil A. Doherty, a professor of insurance at the University of Pennsylvania's Wharton School. Mr. Singer says that the study's conclusions critically understate who could benefit from a life-settlement transaction. For instance, some people might still prefer to sell their insurance policies and leave a smaller estate for their heirs. He also encourages competition among life-settlement firms, which should lead to better selling prices for policyholders.

John Skar, senior vice president at MassMutual, recommends that many customers with impaired health retain their policies, rather than letting them lapse or selling them. "The fact that a sophisticated investor wants to buy it should put a light bulb that the policy is worth something."

Write to Rachel Emma Silverman at rachel.silverman@wsj.com1


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