The Return on a Pool of Senior Life Settlements

Abstract

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value.

TOPICS: MBS and residential mortgage loans, credit risk management