Investing in a sure thing: Life insurance

by Parker Leavitt
The Arizona Republic

Selling life-insurance policies on the secondary market is an increasingly popular way for investors to capitalize on one of life's surest events: death.

Investors, including some major players on Wall Street, buy the policies in bunches, pay the premiums and collect millions upon the death of the insured.

First introduced in the late 1990s, the life-settlement industry has swelled to at least a $12 billion market, according to Connecticut-based Conning Research & Consulting Inc.

Several large investment firms, including Goldman Sachs, JP Morgan and Wells Fargo, have experimented with life settlements.

Opinions about the business are diverse, but many experts agree the market is beneficial to both the buyer and seller.

The secondary market allows elderly policyholders who may no longer need life insurance to sell the policy for several times more than the insurance company would pay for a cash surrender.

"What the insurance companies will pay you is a lot less than what the policy is worth," said Alan Rosenfield, managing director of Harmony Asset Management LLC in Scottsdale.

Life-settlement buyouts can reach six figures, and some policies have been sold for over $1 million.

"Given a policy's true value in the secondary market, life settlements offer someone considering surrender a sensible and compelling alternative," said Marc Ruskin, a regional vice president for Life Equity LLC.

But a life settlement may not be appropriate for everyone.

Financial planner Stephen Barnes of Phoenix said he advises nearly all of his clients to hold on to their policies.

"The (life-settlement) industry is largely unregulated, the fees and commissions are obscene, and the rates of return on investment aren't what they used to be," he said.

Seniors must also beware of get-rich-quick schemes.

"There's a dark side of this business that taints the entire industry's reputation," Barnes said.

Ruskin agreed that some have tried to abuse the system.

"It was the Wild West about 10 years ago when this all started," he said.

Now, some of the largest life-settlement providers have joined together to form the Life Settlement Institute, an organization devoted to the prevention of fraudulent or dishonest life-settlement transactions.

Despite perception problems and a general lack of public awareness, some firms have enjoyed rapid growth, even during the recession.

Texas-based Life Partners Inc. increased its revenue from $30 million in 2007 to $103 million during its most recent fiscal year.

And although the tight credit market has hurt some life-settlement companies, Life Partners President R. Scott Peden is confident his company will continue to grow.

"Investors are looking at life settlements as an alternative kind of investment," he said.

Rosenfield said the concept is simple.

"The fact is people will die," he said. "That's one of the few things that you know will happen. The only question is when."