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As the global financial market underwent a series of transformations in recent years, the life settlement niche has followed suit, steadily rising in importance. The reasons are manifold: as economies grapple with challenges, from inflationary pressures to demographic shifts, some sectors have been thrust into the spotlight, and the life settlement market is one such example.
On one hand, the rising costs of life insurance policies are lurking beneath the surface, with inflation eroding the affordability of these policies for many.
Richard Beleutz, CEO of AIR Asset Management—a leading provider of life settlement and private credit investment solutions—operates within an industry that enables policyholders to explore alternatives, including the life settlement niche. This sector allows individuals to sell their life insurance policies for a more immediate financial benefit.
On the other hand, there’s the phenomenal pace at which the life settlement industry has been growing. The market has shown a considerable post-pandemic rebound, with a $4.5 billion face value in 2022 – compared to $3.9 billion the previous year.
Reflecting on the drop in face amount during the pandemic, Beleutz highlights that despite the drop-off in volume, the market remained relatively intact and functional during COVID and innovated with technology and processes. Life settlements are a valuable alternative to traditional life insurance policies as they allow people to access funds to meet their immediate financial needs.
As the pandemic brought economic uncertainty to many families, Beleutz explains that the market experienced steady growth as life settlement demands were strengthened by the fact many policyholders could no longer afford premiums.
Still, Beleutz reveals the other side of the coin. During COVID, more seniors were predicted to sell their policies due to financial uncertainty. Yet the opposite happened.
“Only 25% of seniors know settling their policy is an option. People clung to their policies in fear of contracting the virus,” Beleutz shares.
Nevertheless, AIR Asset Management’s portfolio remained stable due to a surprising equilibrium. “Although deaths by COVID increased practically speaking, they replaced those from other causes, as people deferred treatments and suffered fewer accidents. This counterbalance maintained our portfolio’s non-correlation, even during a pandemic.”
As for the rising interest rates, the life settlement market will feel its impact. Beleutz states, “We anticipate some adjustments in the market. But this also presents unique opportunities for strategic investment.”
For instance, higher interest rates can lead to decreased policy offers in the short term as the cost of capital for buyers increases. But this could also lead to a surge in policy owners seeking to sell their policies, potentially expanding the supply of policies in the market.
Beleutz further adds, “While the challenges are undeniable, they also open new avenues for growth. For example, the increased profitability for insurers could lead to more attractive policies becoming available in the life settlement market, expanding the potential future supply.”
Nevertheless, Beleutz does warn that the life settlement market, just like any other, isn’t completely immune to these fluctuations. For AIR Asset Management, inflation and interest rates don’t directly influence asset return since the ultimate return, in their case, is generated by a mortality event unrelated to economic activity.
But if rates reached double digits, as seen in the 80s, the demand for the firm’s low double-digit uncorrelated return stream might decrease. This is precisely why Beleutz calls for caution and staying abreast of the market’s ebbs and flows.
Historical regulatory changes are another factor contributing to the life settlement market. Beleutz reveals that it was relatively uncontrolled when he first entered the sector, which allowed some unethical practices to roam free.
Now regulated in 44 states, the market has become more institutional and proven more consumer-friendly with better business models; the added transparency is something that Beleutz believes has had a positive impact.
“With meaningful tax and case laws established, the sector has matured into an institutional space offering greater stability. But I think we’re still looking at more evolution, particularly regarding incorporating technology in our practices,” he says.
Looking ahead, Beleutz’s views of the future are bright, especially considering the sector’s exceptional bounce back from the minimal pandemic-time drops. Considering life settlements’ growing popularity and increasing significance as a financial tool, they’re poised to play a crucial role in shaping investment strategies.
As Beleutz says, “Life settlements aren’t just another asset class. Thanks to their resilience, they might become imperative for many investors seeking stability.”
