Nemo Perera is a senior executive at Risk Capital Partners, a boutique insurance consultancy that specializes in both mitigating risks associated with life settlement transactions and advising wealthy clientele on insurability monetization.Smart investors understand that a crucial part of maximizing their wealth involves leveraging and administering their assets efficiently. However, many individuals overlook an important asset, which, if managed effectively, could significantly boost their net worth: their insurability.
A person’s insurability is simply the total amount of life insurance that he or she can purchase. It is a valuable asset, provided freely by the life insurance industry. In most cases, it is approximately equal to your net worth. In the past, individuals have only considered their insurability when purchasing life insurance policies intended to provide security for their beneficiaries. However, new financial and insurance technologies now enable wealthy individuals to access and monetize this asset while they are alive.
The amount of life insurance that many affluent individuals can purchase often far exceeds the financial needs of their beneficiaries. Unless you stay up at night worrying about the financial security of your wife’s next boyfriend, you can monetize your excess insurability and increase your net worth, while you are still alive to enjoy it. The market for these types of transactions currently totals about $10 billion; we expect it to expand to $100 billion or more in the next several years as individuals learn how to exploit this underutilized asset.
A Bird in the Hand
The emergence of a secondary market for life insurance policies is the driving force behind the ability to monetize your insurability. Until the late 1980s, life insurance companies were the only entities that repurchased their own policies. However, the emergence of the AIDS epidemic spurred the capital markets to develop ways for patients to obtain cash from their life policies while still alive, in order to pay their medical bills and other expenses. Because life insurance policies are typically assignable, policyholders are free to transfer ownership of their policies to third parties. The policyholders therefore sold their policies to brokers called viatical companies, which bundled them together and sold them to investors.
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