I was first told about the life settlement industry while on a business trip to Taiwan in 2003. My immediate reaction was that it was strange to say the least, but more particularly, just a little bit gruesome and possible even unethical. I subsequently became involved in the business as trustee of a trust established to look after the interests of the parties involved. I discovered that just as the mainstream life insurance business itself is actually a matter of gambling upon people dying sooner rather than later, the life settlement industry is no different.


The origins of the secondary life insurance market are quite ancient. However it was not until AIDS appeared in epidemic proportions in the 80's, that this innovative industry began its rapid growth in the United States. At the beginning, it was known as Viatical Investment and the first rules were issued to regulate the market and then to protect the insured individuals and investors.

The Life Insurance Secondary market offers those individuals with a limited life expectancy due to age or illness, the possibility of a departure from this world free of financial anguish but more specifically, the feasibility of taking care of the high costs of more advanced medical treatment and long term care which could not otherwise be funded.

Today this Life Insurance market is known as the Life Settlement Industry. It is a robust financial sector with contemporary laws and regulations that offers real life solutions to the insured individuals and an investment program with high yields and controlled risks for the investors worldwide. It is worth billions of dollars annually.

The Life Settlement Industry has its main support in the strength of the top Life Insurance companies of the United States. There is no documented case in which the obligations of a US Life Insurance company had not been honored, even in the middle of the Great Depression (1929-1932). This is the main reason for the solidarity of Life Settlements as an investment instrument.

The individual concerned will have insured his or her life on a "life only" basis as opposed to some form of endowment policy which would pay out at the earlier of a fixed date or death. In normal circumstances therefore, no cash is payable unless the insured dies before the expiry date of the policy. Such individual's circumstances may change. They may have difficulty paying the premiums. They may have medical and other healthcare needs which cannot be financed out of liquid assets. They may just want to have a good old fling before the kids get the rest of the assets. It seems that the USA is a fertile source of such policies. Accordingly, policies are always in US dollars although the Investors can be from any country.

The Traditional Method

By entering into a contract with a Viatical or Life Settlement Provider, the policy holder of a life insurance policy agrees to viaticate or sell his/her life insurance policy at a discounted rate of the face value so that he/she may obtain early access to the death benefit.  In exchange for this cash payout, the policyholder names the Provider (or the Trustee – see below) the new beneficiary/owner of the policy.   

The Provider now issues for sale entire, fractionalized or pooled interests in the death benefit of one or more such policies to the potential investor. A sales transaction is made between the Provider and the Investor by entering into a Viatical or Life Settlement Purchase Agreement.  The Investor now becomes the new beneficiary/owner of the policy (or part of it) and ultimately collects his/her share of the death benefit when the insured dies and the policy matures.  

A Provider will make certain general disclosures to an Investor of viatical or life settlements before entering into a Purchase Agreement.  Some of these disclosures include the rate of return, the identity of the party or parties responsible for making future premiums and who determines the life expectancy of the insured.

The rate of return on a Viatical or Life Settlement Investment of course depends ultimately upon the actual period of survival of the insured.  Several factors determine the life expectancy of an insured.  Firstly, an investment can be made in either a Viatical or Life Settlement.  The term Viatical and/or Life Settlement may have however different definitions depending upon which state in the US is regulating them.  The insured in a viatical settlement is always terminally ill and usually has thirty-six (36) months or less to live, while the insured in a life settlement is a "senior" generally over the age of sixty-five (65) who may have health complications that even though are not terminal today, may become so in the next few years.  The Provider will provide the Investor with an independent estimated life expectancy of the insured(s) and how that determination was made.   

Since the basis of this Investment is a life insurance product, premiums must continue to be paid until the insured dies and the policy matures.  Funds used to pay future premiums are usually set aside by the Provider/Issuer and held by an Escrow Agent in an escrow account for the estimated life expectancy of the insured. 

Investment Safeguards

From the point of view of the Investor, there are several safety factors that need to be considered.

  • Will the insurance company actually be still around and able to meet its obligations upon maturity of the policy?
  • Will the insured person continue living for many years into the future, thus reducing the potential return on investment?
  • How will the premiums be paid as they fall due, thus keeping the policy valid?
  • Will the Provider actually honour its obligations to ensure that on maturity, the right amount of money goes to the right person?

As has already been stated, there is no history of US based insurers failing. As a precaution, most Providers will only deal in policies issued by Life Insurance Companies domiciled in the USA and with an A M Best rating of B+ or higher

The Provider will procure one or more Life expectancy projection from independent entities specializing in such work. It goes without saying that the Investor never knows the identity of the insured person!

It is common for the total purchase price paid by the Investor for his share in the policy to include an amount equal to a fixed number of year's premiums which again, will be based upon the life expectancy assessed.

The US based Providers will typically use the service of a bank or other financial institution in the US as escrow agent. It is the escrow agent who will hold the newly assigned policy and the advance premiums. The escrow agent will then also be responsible for paying out the respective shares of the maturity proceeds to the Investors. However, without wishing to in any way impugn the integrity of such escrow agents, there have, over the past few years been some scandals involving less than honest operators and assets have been misappropriated. It is for this reason that the Trust approach provides an altogether more elegant and hopefully secure alternative. In the case in which I was involved, the Trustees were fully licensed and regulated and had a fifty year history of providing trustee services and looking after assets worth billions of dollars.

The Trust Structure

A Trust is established in a prominent offshore financial centre in which trustees are licensed and regulated and only "fit and proper" officials may conduct the business. The secret behind the structure lies in the ability for sub-trusts and sub-sub-trusts to be established.

In simple terms, the trust starts life as any other trust with a nominal amount of initial settled funds. The Trustees open three bank accounts at the same bank, namely Purchase Account, Premium Account and Maturity Account. This will enable each of the three classifications of cash trust assets to be held in the right place and makes for easier reconciliation.

How it works

Let us assume that a policy is identified for sale which has a face value of $1 million (payable on death) and the life expectancy of the insured has been assessed at 36 months.

The Provider negotiates the assignment of a life policy in favour of the Trustees. An agreed amount is paid by the Provider to the insured which will represent the face value of the policy less a substantial discount based both upon the insured's life expectancy and also of course the fact that under normal circumstances, the policy is worth nothing to the insured, only his heirs, and even then only if the policy has not previously reached its expiry date.

At the moment that the Trust becomes the legal owner of the policy "P¹" and its eventual maturity proceeds, a sub trust "T¹ is established and its only asset is P¹. The 100% beneficiary at that same moment is of course the Provider who paid for the policy and who has also paid let us say $20,000 being four years' premiums (three years life expectancy plus one) into the Premium Account.

Then an Investor I¹ comes along and pays say $200,000 for perhaps 28% of policy P¹ and also pays say $5,000 representing 28% of four years' premiums. The investor completes the documentation required by the Provider, including full "KYC" information which the trustee will need anyway. The amount invested (and the required insurance premiums) are then paid into the Purchase Account.

The trustees register the participation of the investor in the selected policy by way of confirming I¹ as the sole beneficiary of a newly created sub-sub-trust ST¹. The trustees then confirm to the Provider that they now have just a 72% interest in T¹ (as of course ST¹ now has the remaining 28%). The Trustees pay $205,000 ($200,000 + $5,000) to the Provider in exchange for his reduction of interest in the policy P¹. The process is repeated until all of the remaining shares in that policy are "sold" to investors and who now become the beneficiaries of ST², ST³ etc. of the original T¹ representing the entire policy. As time goes on further policies are acquired and further sub-trusts and sub-sub-trusts are created. In practice, an Investor may take shares in a number of policies with varying life expectancies so as to hedge his investment.

Upon the death of the insured person, the Provider is notified immediately and obtains the corresponding death certificate. The Life Insurance Company sends the payment of the Death Benefit to the Trustees who in turn deposits it in the Maturity Account and then proceeds to pay all the beneficiaries of the relevant sub-trusts and sub-sub-trusts in their respective percentages.

Investor's Return

In the above example (and I have used these figures for illustration purposes only, but they seem to equate to the type of returns being achieved) the return to the investor of 36% works out as follows:

Maturity Of Policy




% p.a.

24 month's time





36 month's time





48 month's time






In the above example, if the policy matures before the fourth annual payment is due; it is the Provider who effectively keeps the unused premium. Conversely, if the insured survives more than four years, the Trustees have an agreement with the Provider that they will make available to the Trustees any additional premiums due.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.