If you thought you could escape the global financial crisis by crossing to the great beyond, think again. The $6.4 billion life-settlement industry -– where firms purchase life insurance policies for a lump sum and then collect when the policyholder dies — has been thrown into turmoil over the past several months.
Earlier this month, one of the largest U.S. life settlement firms, J.G. Wentworth, filed for bankruptcy protection after the credit markets seized and it could no longer borrow to buy additional policies. According to InvestmentNews, additional bankruptcies are expected for life settlement firms as a result of tightening credit.
And to make matters worse, people are living longer.
Late last year several of the firms that calculate mortality tables for life settlement firms rocked the industry by increasing the life expectancies for most groups. That’s good news for people’s health, but bad news for life settlement firms that did not see the change coming.
Life settlements firms profit from razor thin margins on the difference between what they pay in the lump sum to the policyholder and the premiums they must pay out until they collect when the policyholder dies. So the longer people live beyond their expected mortality, the more is costs life settlement investors.
As life settlement firms rack up losses — and sometimes collapse — expect the industry to come under attack from all sides. The broader life insurance industry as historically had a tenuous relationship with life settlement business since it blossomed in the 1990s. Insurers fear that the process of selling a policy to a third party as an investment is confusing to consumers and could create thousands of lawsuits as policyholders dispute the “insurable interest” of the contract.
Thursday, June 18, 2009
Life settlement fund
Life settlement funds have been forced into changes in fund structures in a bid to avoid being hit by the full extent of US tax changes.
The Obama administration has clamped down on US companies taking profits overseas for tax reasons in a move that could hurt life settlement funds, which trade in US life policies.
Life settlement fund provider Policy Selection Limited claims the new policy will mean returns made on the maturity of US life policies will be taxed at 30% when they are taken out of the country.
The company, which operates the Cayman Islands-domiciled Assured fund, has set up a company in Belgium in order to exploit the country’s double tax treaty with the US.
By housing ownership of the fund in Belgium, Policy Selection said it could get around the tax change. The gains will not be taxed when leaving the US because of Belgium’s double tax treaty. Policy Selection will then issue the gains as bonds which will reflect the exact amount made by the fund and so avoid being hit by Belgian withholding tax.
The Obama administration has clamped down on US companies taking profits overseas for tax reasons in a move that could hurt life settlement funds, which trade in US life policies.
Life settlement fund provider Policy Selection Limited claims the new policy will mean returns made on the maturity of US life policies will be taxed at 30% when they are taken out of the country.
The company, which operates the Cayman Islands-domiciled Assured fund, has set up a company in Belgium in order to exploit the country’s double tax treaty with the US.
By housing ownership of the fund in Belgium, Policy Selection said it could get around the tax change. The gains will not be taxed when leaving the US because of Belgium’s double tax treaty. Policy Selection will then issue the gains as bonds which will reflect the exact amount made by the fund and so avoid being hit by Belgian withholding tax.
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