Study by Singer and Doherty Analyzes the Benefits of a Secondary Market for Life Insurance Policies

January 2, 2003

A working paper released by Neil A. Doherty of the Wharton School and Hal J. Singer of Criterion Economics L.L.C. finds that the secondary market for life insurance policies increases the welfare of both new and existing policyholders. The paper, which is forthcoming in the American Bar Association's Real Property, Probate and Trusts Journal (and is currently filed in the Wharton School Working Paper Series), determines that life insurance policyholders who sold their policies to life settlement providers in 2002 will receive $242 million in excess value that would otherwise have been forfeited to insurers. The authors find that among all insurance policies sold in life settlements in 2002 (estimated at $1.5 billion in face coverage amount), life settlement providers paid $336.3 million to acquire policies that had a collective cash surrender value of only $93.4 million, representing a significant gain to consumers.

Viatical and life settlements involve the sale of a life insurance policy by the policyholder to a third party in return for cash compensation. Although these sales are not appropriate for every policyholder, they enable many policyholders to achieve personal or financial goals that would not otherwise be possible. For example, an individual might use the proceeds from a viatical or life settlement to purchase a financial product that better meets his needs, to travel, or simply to maintain a certain standard of living. Furthermore, Drs. Doherty and Singer find that the existence of viatical and life settlements increases the value of life insurance to consumers by improving the liquidity of the underlying policies.

The authors conclude that the development of a secondary market for life insurance policies has enhanced consumer welfare, and that regulators should avoid pursuing regulations that inhibit the growth of this secondary market.

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