Traded Life Policies (or TLPs) are most commonly United States-issued, whole-of-life assurance policies, but mainly Universal Life policies sold before they become claims, to allow the original owner to enjoy some of the benefits during their lifetime. A market for traded endowment and other life policies (or TEPs) has also existed in the UK for many years. The transaction by which an in-force life insurance policy is sold to a third party is known as a life settlement. In the case of whole life policies, the life assured is usually over 65 or with medical impairments. An estimated life expectancy can be obtained using population mortality statistics and evidence of the insured's health. For traded endowments a more important factor to estimate is usually the future bonus (participation) rate.
Holders of life policies might wish to sell before the policy becomes a claim for a number of reasons. It may be that they no longer wish to pay the premiums, or they might need the cash for purposes such as paying for care.
The new owners continue to pay the premiums on the policies until they become a claim, either on the death of the insured life or on the maturity date. This concept of a secondary market for life insurance policies is far from new. A secondary market exists because policyholders can often get a better price for their policies on the open market than by surrendering them to the insurance company that issued them. Even so, investors can still buy them at deep discounts from their expected maturity values. So much so, that they have become a niche asset class for both institutions and private investors, to the extent that there are even mutual funds that invest in them.
History
Traded life policies have existed in the UK at least since 1843.
The market for TLPs in the USA started to grow rapidly as a result of the AIDS pandemic in the 1980s. A large number of people needed cash to pay for their care and a substantial market developed to meet those needs. TLPs sold on lives insured that have been designated as having a terminal illness or to be in terminal decline, with a perceived life expectancy of less than three years, are known as viatical settlements and these were the main type of policies traded in the initial stages of the market. Brokers would offer policyholders prices and find buyers, or ‘funders’. These funders were primarily private individuals, aligned with finance companies.
Many of the AIDS-related policies proved to be a bad investment as life expectancy estimates were notoriously unreliable, due to the advent of new drugs that extended life expectancy. "Viaticals" are still perceived as risky investments and the market has now gravitated towards senior life policies (over-65s), where life expectancy opinions are much more accurate.