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  • June 2018
  • Background Note
  • HBS Case Collection

Introduction to Life Settlements

By: Alexander Braun, Lauren H. Cohen, Christopher J. Malloy and Jiahua Xu
  • Format:Print
  • | Language:English
  • | Pages:16 
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Abstract

Life insurance is an asset owned by the majority of American adults (61%). Note that this 61% penetration rate is essentially at parity with home ownership (64%) and higher than that of 401(k) retirement account ownership (53%). Life settlements, or life insurance settlements, allow individuals to sell their life insurance policy in a secondary market. A life insurance policy is a tradable asset, for many individuals possibly the most valuable one in their portfolio after real estate and perhaps a retirement account. The fact that the policy is tradable, however, is hardly known to the general public. When surrendering a policy to the insurance carrier, the policyholder often incurs a substantial discount on its economic value. At the same time, the insurer keeps the difference between the policy’s economic value and its surrender value. By selling a policy in the secondary market, in contrast, it is common to achieve a price markedly above the surrender value. Hence, life settlements allow policyholders to capture a much larger, if not full, share of their contracts’ economic value. In this Industry Note, we lay out the basic structure of the market, the important players, and the basic economics. We also go into the potential ways to maximize returns in this market for both investors and policyholders.

Keywords

Insurance; Assets; Value; Markets; Investment Return

Citation

Braun, Alexander, Lauren H. Cohen, Christopher J. Malloy, and Jiahua Xu. "Introduction to Life Settlements." Harvard Business School Background Note 218-127, June 2018.
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About The Authors

Lauren H. Cohen

Finance
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Christopher J. Malloy

Finance
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  • The 1,000-Year Plan: Lee Kum Kee and Sustaining a Family Culture By: Lauren Cohen, Dawn H. Lau and Billy Chan
  • Casting Conference Calls By: Lauren Cohen, Dong Lou and Christopher J. Malloy
  • Genomics in the Family Office By: Lauren Cohen, Ronnie Stangler and Spencer C. N. Hagist
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