Cash Surrender Value Research Articles

Life settlements: análisis descriptivo y aspectos cuantitativos

A life settlement is a financial transaction by which an existing life insurance policy is sold to an investor for a greater price than its cash surrender value. In this way, the investor undertakes to pay, if any, the outstanding premiums and has the right to receive the death benefit when the insured dies. This work carries out a descriptive analysis of this type of transaction and a study of its main quantitative aspects. Thus, among other aspects, an overview of the product is offered and its main agents, the nature of the parameters involved in its value and the risks related to it are described. In regards to the quantitative point of view, a new way of analysing the sensitivity of the price of a life settlement to changes in the insured’s life expectancy is introduced. Indeed, we extend the duration and convexity indicators of Stone and Zissu (2008), which use a deterministic approach, to the analytical framework provided by the probabilistic valuation method. Then, we propose to measure the sensitivity of this product to changes in the insured’s mortality multiplier, and not in their life expectancy. The paper also describes the applicability of the new measures for risk management purposes.

Viaticals in the COVID-19 Pandemic Era

Viaticals are life insurance settlement contracts where the investor purchases a life insurance policy from a terminally ill policyholder. In these cases, the present value of the policyholder’s cash flows is substantially above the cash surrender value and below the face value of the policy. The COVID-19 virus (also referred to as SARS-CoV-2 or the coronavirus) has killed and shortened the expected lifespan of many victims, much like HIV-AIDS and other terminal illnesses. This paper suggests a valuation model for a life settlement contract as the framework to contrast the usefulness of viatical contracts during the current COVID-19 pandemic compared to the HIV/AIDS crisis. Contrasting the diseases leads us to believe that viaticals are less useful for dying COVID-19 victims, although they may prove useful for a subset of COVID-19 survivors who suffer life-shortening organ damage.

Life insurance and life settlement markets with overconfident policyholders

We analyze how the life settlement market—the secondary market for life insurance—may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. In our model, policyholders may lapse their life insurance policies when they lose their bequest motives; however, they are overconfident in the sense that they may underestimate the probability of losing their bequest motives. We show that in the competitive equilibrium without life settlement, overconfident consumers will buy life insurance contracts with “too much” reclassification risk insurance for later periods. The life settlement market can impose a limit on the extent to which primary insurers can exploit overconfident consumers. We show that the life settlement market may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently “vulnerable” in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption. Our result is robust to alternative specifications where (i) insurers cannot observe the subjective or objective probability that policyholders will lose their bequest motives; (ii) insurers can include health-contingent cash surrender values (CSVs) in the life insurance contract; and (iii) policyholders underestimate their future mortality risk.

Life Insurance and Life Settlements: The Case for Health‐Contingent Cash Surrender Values

AbstractWe investigate why life insurance policies in practice either do not have a cash surrender value (CSV), or have CSVs that are small and are not adjusted for health status. We show that including health‐contingent CSVs in a life insurance contract causes a dynamic commitment problem, which makes it more costly up front for policyholders to purchase long‐term contracts (because some poor risks who would otherwise have lapsed can and will now capture the CSV instead). To the extent that life insurance policyholders’ incomes tend to increase over the course of the policy, policyholders are not willing to accept higher ex ante premium costs in return for the extra liquidity provided by the CSV. Because health‐contingent CSVs act in a similar way to a life settlement market, we also study the life insurers’ equilibrium choice of CSVs in the presence of a life settlement market. We find that optimally chosen CSVs can partially mitigate the consumer welfare loss caused by the settlement market (as in Daily, Hendel, and Lizzeri, 2008), but only if the CSVs are allowed to be contingent on health status.

Life Insurance and Life Settlements: The Case for Health-Contingent Cash Surrender Values

We investigate why life insurance policies in practice either do not have a cash surrender value (CSV), or have cash surrender values that are small and are not adjusted for health status. We show that including health-contingent CSVs to a life insurance contract causes a dynamic commitment problem, which makes it more costly up front for policyholders to purchase long term contracts (because some poor risks who would otherwise have lapsed can and will now capture the cash surrender value instead). To the extent that life insurance policyholders’ incomes tend to increase over the course of the policy, policyholders are not willing to accept higher ex ante premium costs in return for the extra liquidity provided by the cash surrender value. Because health-contingent CSVs act in a similar way to a life settlement market, we also study the life insurers’ equilibrium choice of cash surrender values in the presence of a life settlement market. We find that optimally chosen cash surrender values can partially mitigate the consumer welfare loss caused by the settlement market (as in Daily et al., 2008), but only if the cash surrender values are allowed to be contingent on health status.

Surrender Risk in Life Insurance Policies

Life insurance often embeds a surrender option that gives the policyholders a right to exchange an existing contract for its cash surrender value. Similar to mortgage prepayment option that imposes a cash-flow risk to MBS investors, this surrender option is a source of concern for life insurers. While prior studies have attempted to quantify this surrender risk by pricing the surrender option, a common theoretical assumption imposed is a fully rational response of policyholders to only interest rates. However, actual surrender experience indicates that interest rates are just one of the multiple factors that drive the surrender decision and policyholders' response is not necessarily optimal. This paper integrates an empirical surrender function into the option pricing framework by employing a novel data set from a large life insurance industry experience study. It shows, for the first time in the literature, that policy vintage is a particularly significant and meaningful factor in addition to macroeconomic variables that impact surrender activity. Using these empirics, I find that the experience-based value of the surrender option is substantially less than its fully rational counterpart. In addition, the competitive landscape of the life insurance industry and the interest rate environment both play an important role in assessing the surrender risk exposure of life insurers.

Role of Insurance in Economic Growth and Inclusiveness – the case of India

A B S T R A C T Indian economy has witnessed a turning point from the traditional low growth to the modern high growth since 1980's. The changing growth rates of GDP have impact on saving. In most of the life policies elements of saving predominates. With traditional forms of life insurance, the savings element is considered a by-product of the level premium method of payment. With universal life and some other newer policy forms, the savings element is often considered as a more independent part of the policy, specifically designed to build a savings fund. The policy reserve (a liability for the insurer) is considered as a fund held on behalf of an individual policy owner. Economists and marketing personnel tend to view a level premium whole life contract as a divisible contract providing financial protection to the policy owners beneficiaries, with other contract benefits available, including cash surrender and loan values arising from the mandatory premium contributions, hence the need for this study. This paper analyses the trend in GDP growth rates and its impact on saving. It studies changes in the financial saving as composition of the total saving and changes in savings with life insurance as a composition of financial savings. The paper by studying the percentage of insured population to total population evaluates the extent of inclusiveness, as it is one of the major social security tools available for the population in the absence of other social security benefits available from the government agencies.

Incorporating Longevity Risk and Medical Information Into Life Settlement Pricing

ABSTRACTA life settlement is a financial transaction in which the owner of a life insurance policy sells his or her policy to a third party. We present an overview of the life settlement market, exhibit its susceptibility to longevity risk, and discuss it as part of a new asset class of longevity‐related securities. We discuss pricing where the investor has updated information concerning the expected life expectancy of the insured as well as perhaps other medical information obtained from a medical underwriter. We show how to incorporate this information into the investor's valuation in a rigorous and statistically justified manner. To incorporate medical information, we apply statistical information theory to adjust an appropriate prespecified standard mortality table so as to obtain a new mortality table that exactly reflects the known medical information. We illustrate using several mortality tables including a new extension of the Lee–Carter model that allows for jumps in mortality and longevity over time. The information theoretically adjusted mortality table has a distribution consistent with the underwriter's projected life expectancy or other medical underwriter information and is as indistinguishable as possible from the prespecified mortality model. An analysis using several different potential standard tables and medical information sets illustrates the robustness and versatility of the method.

2009 Revenue Rulings Give Seniors and Life Settlement Industry a Few Answers, But More Questions - Updated

ISI RESEARCH BRIEF: Project: Taxation of Life Insurance Policies, 2009Status: Completion Expected Summer, 2009Lead Researcher: Professor Morgan Holcomb, State & Local Tax Law, University of Minnesota Law school; Brent Schreiber, University of Saint Thomas Law Student; Christopher Kampa, ISI Research AnalystISI Oversight: Paul Siegert, ISI President and CEO; Christopher Kampa, ISI Research AnalystProject Description: A life settlement is the sale of an insurance policy to a third party investor. Tax law provides specific regulations pertaining to taxation of gains on distributed cash surrender values, death benefits to beneficiaries and death benefits to parties that purchased life insurance policies, but such regulations are unclear when applied to gains on life settlements and premium financed policies. Previously, the IRS provided no formal guidance on the issue of taxation for either sellers or investors. On May 4th, 2009, the treasury department issued new tax guidance regarding life settlement transactions. The issuance of Revenue Ruling 2009-13 and 2009-14 has provided answers to some of these questions, but has given rise to new ones. Scope of Research/Methodology: In 2008, the Insurance Studies Institute published a white paper analyzing the tax ramifications of life insurance, policy lapses and surrenders, premium financed policies, and life settlements. The ISI 2008 paper will be updated based on the newly issued IRS revenue rulings. The paper will analyze the calculation of cost basis, adjusted tax basis, and differentiation between ordinary income and capital gains.Timeline: The project should require 80 to 120 hours to research and draft.Topics Covered:1. Taxation of Insured2. Taxation of Domestic Investors3. Taxation of Foreign Investors4. Effect of Taxation on Insurers5. Legality of IRS Revenue Rulings6. Economic Impact of TaxationAppendix, Data Sources:• Taxation of Life Insurance Policies in an Evolving Secondary Marketplace, ISI, 2008 • IRS Revenue Ruling 2009-13• IRS Revenue Ruling 2009-14• Daily Tax Report, BNA, Inc.• The Future will be Better Tomorrow: The Obama Tax Agenda is Released, Greenberg Traurig Tax Update• Tax Alert, Sadis & Goldberg, LLP• “New Tax Proposals Target Life Insurers” Wall Street Journal• Other technical resources as appropriate

해약공제기간과 해약환급금에 대한 실증분석

해약공제기간과 해약환급금에 대한 실증분석

How Does Life Settlement Affect the Primary Life Insurance Market?

We study the effect of the life settlement market on the structure of long term contracts offered by the primary market for life insurance, as well as the effect on consumer welfare, using a dynamic model of life insurance with one sided commitment and bequest-driven lapsation. We show that the presence of life settlement affects the extent as well as the form of dynamic reclassification risk insurance in the equilibrium of the primary insurance market, and that the settlement market generally leads to lower consumer welfare. We also examine the primary insurers’ response to the settlement market when they can offer enriched contracts by specifying optimally chosen cash surrender values (CSVs).

生命保険契約における解約返戻金規整

解約返戻金およびその算定方法・金額については，商法には規律がなされていなかった。こんにち，低（無）解約返戻金保険，変額年金保険および市場金利連動型解約返戻金保険等が開発されるに至ったが，これらの解約返戻金算定基準は伝統的な生命保険のそれとはまったく異なるので，今般新たに成立した保険法に解約返戻金に対する規律を設けることを望む声もあった。しかしながら，結局，保険法に解約返戻金に対する規律は定められず，保険料積立金に対する規律が設けられたに過ぎない。本稿は，保険法が新たに制定されたことを契機に，商法における「被保険者ノ為メニ積立テタル金額」の意義と，解約返戻金に対する規律を再検討し，保険法下における保険料積立金に対する規律の可能性と解約返戻金に対する規律の限界を考察することを目的とするものである。

The Return on a Pool of Senior Life Settlements

In this article we illustrate how the yield on an investment in a block of life settlement contracts changes across prices paid for the policies and how the yield for an offered price changes when the actual life of the insured extends beyond life expectancy. The reader will see that earning yields between 7% and 11%, figures that have in the last few years been touted in the life settlement industry, are associated with offers for policies that are relatively high discounts from face value, and that even a six-month extension in life beyond the life expectancy reduces the actual yield an investor will earn, below the 7% to 11% range. Once fees are deducted each period, which is the way the managers and owners of investment funds are compensated, the discount from face value consistent with each yield is reduced even further. Our objective has not been to find the appropriate discount rate for a pool of senior life settlements but more simply to illustrate how the required yield on an actual block of life settlement contracts dictates the price that investors can offer for policies. We also show that as required returns increase, the value that can be offered for life settlement contracts approaches the cash surrender value. <b>TOPICS:</b>MBS and residential mortgage loans, credit risk management

Fair Valuation of a Guaranteed Life Insurance Participating Contract Embedding a Surrender Option

AbstractIn this article we deal with the problem of pricing a guaranteed life insurance participating policy, sold in the Italian market, which embeds a surrender option. This feature is an American‐style put option that enables the policyholder to sell back the contract to the insurer at the cash surrender value. Employing a recursive binomial formula patterned after the Cox, Ross, and Rubinstein (1979) discrete option pricing model we compute, first of all, the total price of the contract, which also includes a compensation for the participation feature (“participation option,” henceforth). Then this price is split into the value of three components: the basic contract, the participation option, and the surrender option. The numerical implementation of the model allows us to catch some comparative statics properties and to tackle the problem of suitably fixing the contractual parameters in order to obtain the premium computed by insurance companies according to standard actuarial practice.

Capital Forbearance: Depression‐era Experience of Life Insurance Companies

AbstractThe multinational Sun Life Assurance Company was insolvent at market values in the 1930s as a result of a diminution in the value of its heavy investment in common stocks. Many of its competitors were also insolvent when their asset portfolios are marked to market. Industry‐wide forbearance in the form of regulatory accounting window dressing misrepresented true technical solvency and helped Sun Life and a number of its major competitors to remain in business during the Depression years. We conclude that widespread capital forbearance, and not portfolio diversification, explains the survival of many large financial institutions in the 1930s.RésuméLa non‐solvabilité de la compagnie multinationale d'assurance Sun Life au cours des années 1930 était due à la diminution de la valeur marchande de ses gros investissements en actions. Plusieurs de ses concurrents ont fait la měme expérience avec des portefeuilles de titres échangés sur le marché. L'absence d'intervention de la part des organismes de réglementation à l'échelle de l'industrie sous prétexte de réglementation de la comptabilité a permis de mieux appréhender le vrai cadre technique de la solvabilité et a assuré le maintien de la Sun Life ainsi que celui de ses principaux concurrents au cours des années de la dépression. On conclut que cette absence courante d'intervention auprès des institutions financières en difficulté, plut&amp;#x006f;&amp;#x030c;t que la diversification de portefeuille, explique la survie des grandes institutions financières au cours des années 1930.

The Effects of Risk Reduction Inherent in Universal Life Insurance: Author's Reply

Universal life insurance has moved from theory to reality.1 Presently marketed products falling into this generic class shift the mortality and investment risk to the policyowner with current rates guaranteed during the first year but subject to maximum mortality rates and minimum interest rates during subsequent policy years. The universal policies offer high current yields near money market rates on the savings element an element that resembles traditional cash surrender values in name only. A formula specified in the policy is used to determine the available savings. A typical plan might involve one like the following:

Replacement of Life Insurance: Comment

assumption for the economic justification of the entire article. No other replacement figure is given. Consequently, the entire economic justification of the paper is based on a percentage of unknown origin. No supportive material is given as to why 20 percent was chosen. The reader has no way of knowing why 20 percent is better than 10 percent or 40 percent. At the minimum it seems the author could have made a survey of life insurance companies and obtained their estimates of the magnitude of the problem or determined the volume of disclosure forms filed with several state insurance departments. This investigation would at least give one a minimum figure from which to build. This replacement percentage is just a minor problem. The real problems with the RLI article are with the methodology of the capital budgeting model. Specifically, there are three areas of concern: the discount factors used, lack of incremental cash flow analysis, and confusion between sunk costs and salvage value. The first problem that is encountered in the RLI paper is the discount factors used on the cash surrender values (CSV) of the Columbus Mutual (CM) policy on page 216. (For the reader's convenience the first three and last two years of data from the RLI article are reproduced in this comment). In Table 1 Kensicki shows a discounted value of 145.63 in the

A Critique of the Interest-Adjusted Net Cost Index: Comment

In a recent paper [1] Scheel discusses the IA index. He argues that it is too simplistic and that it produces policy rankings which do not reflect the preferences for wealth that most people have. He also suggests that the IA index is subject to manipulation and distortion just as the net cost index is. To get over these difficulties he proposes a Risk Premium (RP) index which takes interest and the probability of survival into account and makes allowance for the cash surrender value schedule as well as the dividend scale. In the present comment, some features of the RP index are examined. In particular, the effect of changes in the projected dividend scale on the RP index is examined. It is found that the dividends shown for the years just following issue are given relatively heavy emphasis. Consequently if the RP Index were adopted this could induce a company to move towards a more level dividend scale and some of the possible consequences are examined. In order to overcome one of Scheel's criticisms of the IA index a Modified IA index is proposed which takes both the projected dividend scale and the cash surrender value scale into account. This proposed new index involves a simple modification of the IA index and only requires the policy details and compound interest functions for its calculation. Finally, some of the problems associated with devising a suitable cost index are discussed. The point of departure is the formula for the IA index. Assuming a planning horizon of H and a rate of discount of r the IA equation is

THE CONCENTRATION OF PERSONAL WEALTH IN AMERICA, 1969

This essay focuses on the problems of estimating the share of America's personal wealth in the hands of affluent individuals by a technique known as the estate multiplier method. Rather than exploring these problems in an empirical vacuum, we first present some results from the most recent estimates of the distribution of U.S. personal wealth.1 The estimates—for the year 1969—are then used as a basis for gauging the sensitivity of estate multiplier estimates to variations in approach.Section I presents new empirical findings dealing with the asset holdings of top wealth‐holders and the super rich, and with the shares of specific assets owned by them. Also presented is information about the sex and marital status of the super rich.Section II discusses various technical aspects of the estate multiplier as applied to federal estate tax returns. The main concern is with the weighting process, but attention is paid to the fact that estate tax returns filed in a given year are not for decedents who died in that year or any single year, and to the problems of adjusting the face value of life insurance to cash surrender value.

Calculation of Life Insurance Gross Premiums: A Suggested Modification of the Traditional Textbook Approach

The purpose of this paper is to describe an approach to gross premium calculations that has been used by the author in an attempt to provide students with a clearer understanding of the nature of the process. The system is designed primarily as a teaching device rather than as a description of the way in which life insurance companies actually calculate gross premiums. Assumptions are made about interest, mortality, lapsation, expenses, cash surrender values, dividends, and profit. Then the gross premium is calculated by solving a linear equation in one unknown. Collegiate life insurance textbooks attempt to describe the manner in which life insurance companies develop gross premiums. Some authors have been more successful than others in communicating the essentials while avoiding such a high degree of complexity that students become discouraged. From time to time, textbook revisions incorporate certain new Joseph M. Beith, Ph.D., C.L.U., C.P.C.U., is Associate Professor of Insurance in the Graduate School of Business at Indiana University. He is author of Participating Insurance Sold by Stock Companies (1965), for which he received the 1966 Elizur Wright Award of the American Risk and Insurance Association, and The Retail Price Structure in American Insurance (1966). Dr. Belth is a frequent contributor to this Journal and serves as its Communications Editor. He has received four N.A.I.I. awards for papers published in this Journal. The author wishes to acknowledge the assistance of Norman L. Chervany, a doctoral candidate in Indiana University's Graduate School of Business. From the author's detailed instructions Mr. Chervany wrote the computer program used in the preparation of this paper. The author alone, however, assumes full responsibility for any errors that may remain. The computer used was the CDC 3600 in Indiana University's Research Computing Center. This paper was submitted in January, 1967. techniques, and occasionally a summary of current procedures is published.' Although the materials generally made available for students seem to achieve some success in describing the procedures involved in the calculation of life insurance gross premiums, such materials seem to be deficient in helping the student gain a real understanding of the meaning of those procedures. The purpose of this paper is to describe an approach to gross premium calculations that has been used by the author in an attempt to provide students with a clearer understanding of the nature of the process. Several points should be noted at the outset. First, the procedure described in this paper is intended solely to help students understand the essentials of gross premium calculations. The paper is not intended to suggest that the system is or should be in actual use by companies, although some companies are apparently using such an approach or modifications of it. Second, a number of hallowed terms I See, e.g., Alfred N. Guertin, Life Insurance Premiums, Journal of Risk and Insurance, Vol. XXXII, No. 1 (March, 1965), pp. 23-49.