The US Secondary Market

In 2008, income from premiums of life insurers around the world came to 2,409 billion dollars. With a premium share of 29 percent, the U.S. is the world’s largest market for life insurance policies. Moreover, the market holds tremendous potential because well over half of all life insurance policies in the U.S. are terminated prematurely. Since life insurance policies in the U.S. generally do not serve as a form of retirement provision for the policyholder, but instead as protection against individual risks such as providing for the family in the event of the policyholder’s death, the provision of funds for payment of estate tax or servicing a mortgage, the policyholder frequently is no longer interested in keeping up the policy when circumstances in his life change. Instead of cancelling the policy and receiving a lower surrender value (or even no surrender value at all), policyholders usually obtain higher proceeds by selling their policy. German investors have also been able to invest in existing U.S. policies since the end of 2002, almost independent of the developments on the stock, bond and interest markets. However, some policies customary in the U.S differ considerably from the term or life endowment life insurances known in Germany.

Different Types of Policies

In contrast to England and Germany, the policies offered for purchase on the US market are mainly straight life insurance policies with a savings portion (universal life, whole life) or without a savings portion (term life). Here a distinction is generally made between insurance policies with limited terms term life insurance) and those which exist for the entire life span of the insured (permanent life insurance).

The Modus Operandi of the US Secondary Market

Investors acquire US whole life insurance policies from policyholders, are registered as the new beneficiary, assume the premium payment obligations, and are paid out the insurance sum upon occurrence of the insurance contingency (death of the insured). Thus, the difference from the sum payable at death and the purchase price – plus further paid premiums – substantially influences the proceeds from this business model.

In contrast to the German life insurance secondary market, the amount of the expiry benefit (benefit in the event of death) is already fixed at the time of investment here. However, the time of payment – other than in the secondary market with Germany policies – remains unclear, since it is contingent on the occurrence of the insurance contingency. On the basis of the insured's medical reports, medical institutes (medical underwriters) will estimate his/her residual life expectancy. The quality and reliability of such life expectancy reports play an important role in regard to two aspects: They affect the reliability of the forecast and the investment success.