Address a Societal Need While Generating Returns with Life Settlements

Laureola Advisors

11 June 2021

Due to slow-changing legacies, popular investments such as equity and bonds fund usually start their ESG journey through implementing negative screening to exclude investments whose activities are generally considered harmful. However, it is still difficult to directly link the remaining assets to having actual positive ESG impact. These assets might just be less harmful.

Positive ESG impact assets are not immediately obvious because most investors are not used to the idea that assets that service a societal need can be profitable. The opportunity in life settlements shows how helping others can be profitable too.

What are life settlements?

Life settlements are resold life insurance policies. They can be understood as a form of financing extended to an individual (usually a senior) secured by that person's life insurance policy. With reference to the illustrative example below, a life settlement fund buys the life insurance policy from the insured policyholder, and commits to paying future insurance premiums until the insured person dies. The fund then collects the death benefit payout from the insurance company as the concluding repayment of the life settlement transaction.

Life settlement funds are bringing forward the death benefit of a life insurance policy and paying out the policyholder whilst they are still alive. It is a way of monetizing an asset that the insured had diligently paid premiums on for decades. When viewed with such lens, one can see how the life settlement is potentially disrupting the insurance industry for the good of the insured.

How can an investment in life settlements where returns are made when the insured dies be a social good?

The positive impact that can arise from an investment in life settlements is improved physical and financial wellbeing of senior citizens in the United States (the most active life settlements transactions market is in the US). An investment in a life settlements fund can help vulnerable retirees and tackle three ESG-related issues in the US:

1. There is a shortfall of retirement savings in the US.
   The National Institute of Retirement Security estimates that approximately 44% of people born between 1944 and 1979 are at risk of having insufficient income to meet basic day-to-day expenses in retirement.
    
2. Due to the savings shortfall, seniors cannot access long-term care.
   The average middle-class senior citizen does not have sufficient savings to cover the cost of long-term care. When accounting for long-term care costs, 69% of households are at risk of being unable to maintain their standard of living in retirement.
    
3. Instead of helping to ease this shortfall, life insurance policies add to the burden with demands for insurance premiums while the senior is alive.
   Every year since 2009, over 33 million life insurance policies terminate prematurely which means the policyholder does not realize a benefit from the policy despite paying premiums for decades. The American Council of Life Insurer reported over 90% of life policies terminate without paying a death benefit in 2018.

Life settlements can be a solution to these issues by providing a cash payout to the seniors and by shifting the burden of the insurance premium to life settlement investors. By investing in this asset class there is potential for:

• Retirees to use life settlement proceeds to replace pre-retirement income and help maintain a dignified standard of living.
• Frail and disabled persons to use life settlement proceeds to pay for long-term skilled nursing, subsequently reducing the burden on the shoulders of family or government programs.
• The benefit of decades of premiums paid on a policy to be realized by an individual in need rather than forfeited to insurance companies.

A life settlement market gives the insured additional options in realizing a higher percentage of the face value of the policy. Researchers from London Business School estimated in 2013 that the value unlocked by the life settlement market is about four times greater than that of the surrender value offered by insurance companies.

Are life settlements even legal?

Life settlements are heavily regulated in the US and can be suitable for ESG-biased investors. The US government recognizes the social good that life settlements provide. For example, a bipartisan bill (the proposed Senior Health Planning Act) was introduced in early 2020 to provide better tax treatment for seniors to sell their policies to the life settlement market.

As life settlements provide better financial outcomes for seniors and promote better corporate governance within insurance companies, regulations were introduced not to limit life settlements transactions but to promote and encourage responsible behaviour amongst participants. A strong transparent secondary market can help keep insurance companies in check.

We have a potential tick on ESG alignment - what about returns to investors in life settlement?

By providing this social good to seniors, investors in life settlement funds can potentially obtain consistent stable returns which are uncorrelated to the more popular investments such as equity and bonds. Using the offshore Laureola Investment Fund as a proxy for life settlement returns (as there are no widely used benchmark in this private market), the fund has historically generated 16.2% p.a.* (in USD terms and net of expenses) in 8 years of operations. In addition, the 2013 Naik study of long-term returns also found low correlation between the risk of life settlement transactions and other financial markets.

While life settlements might not look like a candidate as a force for ESG-aligned investing, its fundamental raison d'etre is to address a societal need for better retirement provision. Life settlement specifically helps policyholders monetize their decades-long of diligent premium payment for a more dignified standard of living and care. In return for such social good, life settlement investors can obtain potentially stable uncorrelated returns which has historically been in the teens.

*Past performance is not indicative of future performance. Wholesale investors only. Terms, conditions, and risks apply, for more information please refer to the Information Memorandum.

Laureola Australia Pty Ltd (ACN 643 122 203) operates under a Corporate Authorised Representation (CAR No. 001283071) from Quay Fund Services Limited (AFSL No. 494886). Laureola Australia Pty Ltd is authorised to provide general product advice regarding the Fund only.

Funds operated by this manager:

Laureola Australian Feeder Fund