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May 23, 2005

Actuarial Study Indicates Retaining Life Insurance Contracts Until Death Likely Exceeds Value Paid in Life Settlement Transactions

A new study analyzes issues arising from the premature sale of life insurance contracts by impaired policyholders, including the elderly. The comprehensive research, titled "The Life Settlements Market -- An Actuarial Perspective on Consumer Economic Value," compares the life settlement value received upon the premature sale of a life insurance policy with the intrinsic economic value of a policy held until death. This study was paid for by a group of insurance companies, including Massachusetts Mutual Life Insurance Company, which engaged Deloitte Consulting LLP to conduct the study with the assistance of the Deloitte-UConn Actuarial Center at the University of Connecticut.

In a life settlement transaction, existing policyholders transfer ownership of their life insurance policy to an unrelated investor who seeks to receive a high rate of return on investment upon the policyholder's death. (When an insured person experiences a negative change in health, the economic value of the policy appreciates, which is why outside investors typically want to acquire the policy.) In return, the policyholder receives immediate cash from a life settlement company.

The research indicated that life settlement transaction costs -- such as commissions, marketing, overhead and profit -- represent 50 to 67 percent of the policies' intrinsic economic value (as defined in the study). Further, the study concluded "the policyholder with impaired health could maximize her estate value if other assets are liquidated and the life insurance policy is maintained until death...The potential yield of a life insurance contract when the policyholder's health has deteriorated is so great that other creative options to preserve the contract should be explored before making any decision to sell."

The study included a review of filings with the New York Insurance Department for life settlement sales completed from 2000 to 2003. The results showed that, on average, the intrinsic economic value (as defined in the study) of policies sold in that period was 64 percent of the face amount. Based upon this review, the study determined that: "[These] Life Settlements companies paid out 20 percent of the face amount. This means that 44 percent of the face amount was lost (or not realized) due to the transaction costs (expenses, taxes and profits) involved in the Life Settlements sale."

Ultimately, the study concluded, "It is likely that the target market that could truly benefit from the Life Settlements industry is significantly smaller than currently perceived."

The full study can be viewed on the Internet at http://www.lifesettlementseducation.com.

Posted by Tom Troceen