Why Policy Due Diligence Is Essential When Buying Life Settlements in the Secondary Market
The acquisition of a life insurance policy by a life settlement investor in the secondary market is a multi-faceted effort, combining actuarial, regulatory and investment mechanics. These forces combine to make policy buying a complex process, which, if not performed correctly, pose significant risks to the success of a diversified life settlement portfolio.
This means that a robust policy due diligence effort is essential. Best-in-class life settlement portfolio managers excel in three core areas when sourcing policies in the secondary market: verifying clean origination and transferability, confirming the policy’s true economics, and ensuring medical recency and underwriting integrity. Addressing these aspects upfront reduces hidden risk, improves pricing accuracy, and maximises returns.
Verifying Clean Origination
A fundamental pillar of the entire life insurance industry is the concept of insurable interest, which states that the beneficiary of a life insurance policy must benefit from the insured living longer. Both regulations and case law have established that insurance policies with no insurable interest are void, which means that life settlement investors must ensure that each policy originated with proper insurable interest. Even minor gaps in documentation can create disputes over the validity of the policy and the subsequent beneficiary rights.
A clean origination history reduces the risk of legal challenges down the road and ensures that the investor holds a defensible title to the policy. This process involves reviewing the original application, and carrier correspondence to confirm the integrity of the ownership. By establishing clarity upfront, investors can avoid surprises that may otherwise arise months or years later, preserve expected cash flows, and strengthen the enforceability of claims. In secondary acquisitions, early and thorough verification is a foundational component of the policy acquisition effort.
Confirming the Policy’s True Economics
Understanding a policy’s true economics is central to accurately pricing secondary life settlement transactions – and therefore, portfolio returns. Beyond the policy face value, investors must verify the exact premium schedule, any no-lapse guarantees, the cost-of-insurance structures, and any hidden balance-sheet items such as policy loans or accrued interest. Even small discrepancies can materially affect the projected cash flows and risk-adjusted returns.
Therefore, the due diligence process involves reviewing the in-force ledger (the official accounting record of the policy from the carrier), contract language, and carrier illustrations (how the policy is expected to perform under certain circumstances) to confirm what premiums must be paid under various scenarios, not just what has been paid historically. Policies issued across different years or by different carriers can include heterogeneous forms and provisions, making granular analysis essential.
Ensuring Medical Recency and Underwriting Integrity
Accurate pricing for secondary life settlement transactions depends on reliable, up-to-date medical and underwriting information. It is commonplace that life insurance policies entering the secondary market have been issued years – decades, indeed – earlier, and therefore, underwriting assessments are either inaccurate or absent. Ensuring ‘medical recency’ means obtaining the latest medical records, verifying the current health status of the insured, and confirming that any relevant impairments are properly documented.
Underwriting integrity requires a thorough review of the original application, laboratory reports, and physician notes to ensure that life expectancy estimates are based on complete and accurate information.
Life settlement portfolio managers often engage independent actuaries or medical underwriting specialists to validate or compare their own longevity assessments, particularly for large face amounts or older policies, as even a small gap, inconsistency or error can materially impact returns.
Building Confidence Through Rigorous Due Diligence
Secondary market life settlements offer institutional investors access to scale, vintage diversification, and attractive risk-adjusted returns. But these benefits are only realized when the underlying policies are thoroughly vetted.
Verifying clean origination and transferability ensures that ownership chains are defensible and free from disputes. Confirming the policy’s true economics aligns projected cash flows with contractual reality, reducing the risk of unexpected shortfalls. Ensuring medical recency and underwriting integrity safeguards pricing assumptions and enhances confidence in longevity projections.
Taken together, these three pillars form the foundation of an effective approach to policy due diligence in the life settlement secondary market.
Bill Corry is Managing Partner at Corry Capital Advisors
