Life Settlement Market Benefits

In a perfectly competitive market, an increase in cost could lead to insolvency among certain firms in the industry. The doomsday projection of the incumbents, however, ignores two important points: first, the life insurance industry is not perfectly competitive, and second, a robust secondary market will increase customers' valuation of life insurance policies. Economic theory holds that an active and efficient secondary market for a good improves the liquidity of the good as an asset, and thus increases the value of the good to consumers. Indeed, this very phenomenon was observed in all three financial service industries considered in this paper. Such an increase in the valuation of life insurance policies would—other things equal—shift the demand for life insurance outward and to the right, which would lead to an increase in premiums for life insurance.

A secondary market for life insurance policies erodes the ability of insurance companies to extract monopsony rent from policy terminations policyholders who have experienced a decline in health. An insurance company is forced to either compensate a policyholder for the surrender of his policy according to the market value of that policy, or face the prospect of the policyholder selling his policy to a third party (such as life settlement firm), in which case the insurance company's liability deriving from the policy would remain intact.

Viatical and life settlement firms allow policyholders who have experienced a negative shift in life expectancy to obtain the fair market value for the it life insurance assets. Although it does not make sense for most policyholders to surrender their policies at the market value," the flexibility offered by the secondary market for life insurance policies gives a policyholder the ability to respond to changes in his life situation. CONTINUED