While investing in this alternative asset class has clear benefits, negotiating your way through this niche market is not always easy. This is where Life Policy Group can help.
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Why small face policies?
Traditionally, Life Settlement investing focused on buying a small number of high value policies. However, at LPG we argue that it’s better to spread the risk among many small face policies rather than, for example, one $3.2million policy (the average policy size traded) because an investment spread across 10-20 policies offers investors a more attractive risk profile than investing in a single policy.
A traditional portfolio of policies and a small face portfolio have two distinct differences:
Number of policies
In a traditional portfolio with a face value of $100m you expect to have circa 40 policies; whereas a small face portfolio would have between 200 and 400 individual policies.
Face value
The average face value of a policy in a traditional portfolio is around $2.5m. A policy of this size is clearly bought by people with higher socio-economic profile. Whereas small face policies of $200k+ are more commonly purchased by individuals further down the socio-economic scale. This has implications for the cost of the policy as well as the likelihood of the policy maturing on or before LE.
What are the key differences between small face policies and high face policies?
High face policies are typically purchased by white collar workers, who are more likely to have regular medical reviews and access to the finest health treatment. It’s also reasonable to assume that these policy holders have a lifestyle that supports their health including controlled food regimen, exercise and reduced stress levels.
High face policies are often bought as investments, estate planning or tax mitigation by older people and consequently have been in force for a short period of time. Whereas small face policies are usually seasoned having run for more than 10 years and having been bought for the purpose of insuring a life i.e. protection, funeral expenses.
Small face policies are typically purchased by individuals, who may have less regular, or even no, medical reviews until they become ill. Small face policy holders may well eat badly, take little or no exercise and due to financial problems, leading to the sale of their policy, be highly stressed.
Small face policies are generally purchased from the more demographically challenged areas, for example, a policy with a face value of $250k may be bought from a blue collar area in a major city and a high face policy purchased from a high end residential area in that same city. Yet the cost of insurance per $ would be unlikely to be different.
Small face policies may not have been underwritten for illness and even without a medical (possibly through the company scheme) meaning that the premium pricing will be lower pro rata. Even if that were not the case, a significant life threatening illness may well have developed ahead of the underwriter’s expectation and be reflected in the new information gathered when the policy is purchased. This statement is not necessarily true for high face policies as many of these were only underwritten in the last few years.
Both high face and small face policies are valued within mortality tables which are used by the industry to assess life expectancy. Naturally, these tables are based on averages. So one might suggest therefore that high face policies would appear on the high side of the life expectancy curve while small face ones would appear on the low side thus generating the average.
So why invest in a small face portfolio?
A small face portfolio, because it contains more policies, will deliver diversity, spread and will almost certainly be a lot smoother and less susceptible to outliers than high value portfolios. Also, a small face portfolio may not be that affected by large swings in Life Expectancy (LE) extensions caused by advances in medication.
Since small face policies tend to have been in force for a longer period than high face policies, they are likely to have been bought for the purpose of protection and may well have been priced without any medical underwriting, they can therefore offer the investor better value.
