The Connection Between Interest Rates and Life Settlement Investors
Exploring the effect that interest rates have on Life Settlements starts with understanding how rate increases affect credit. A few things happen as rates rise, including:
Borrowing becomes more expensive.
Newly issued debt instruments offer higher rates.
Existing debt instruments with lower fixed rates decrease in value in the secondary market.
Historically, institutions have been the primary investors in Life Settlements. They pay qualifying policyowners less than the death benefit but more than the cash surrender value. Upon transaction completion, the institution becomes the policy’s new owner and beneficiary.
As a result of these changes:
The institution is responsible for keeping the policy in force so it can collect the benefit when the insured passes away.
The difference between the death benefit and the cost of purchasing and maintaining the policy becomes the return on investment (ROI).
ROI has frequently reached double digits in the past, creating a consistent demand in the secondary market.
Impacts on Life Settlements by Interest Rates
Previously, numerous institutional investors funded their Life Settlement purchases with credit. The challenges rising rates pose to this approach include:
As rates rise, accessing credit becomes more expensive, with borrowers incurring higher costs to obtain and use it.
The collateral they can offer for secured credit lines also may have declined in value if their portfolios hold debt vehicles with lower rates.
Both of the challenges mentioned above impact the institutional investors’ borrowing power.
Higher costs reduce the potential ROI.
For policyowners, these realities mean:
The demand for Life Settlement purchases may drop, which could translate to lower policy valuations and reduced payout offers.
Whether the Fed continues raising interest rates depends on inflation, and they have not ruled out the possibility.
Many experts are advising potential Life Settlement clients to get policy valuations sooner rather than later.
Unlock Your Policy’s Value With Settlement Benefits