Introduction
Most people understand life insurance in its original form:
- An insurance carrier issues a policy.
- The policyholder pays premiums.
- A death benefit is paid to beneficiaries upon death.
Far fewer understand that life insurance policies may also trade in what is known as the secondary market for life insurance. This market is where existing life insurance policies are transferred to licensed third parties in structured, regulated transactions commonly referred to as life settlements.
Key questions include:
- What is the secondary market for life insurance?
- Who buys life insurance policies?
- How do life settlement investors make money?
- How are policies priced?
- Is this a legitimate financial market?
If you are new to life settlements generally, begin here:
Read More: How the Life Settlement Process Works
This article explains the structure, capital flow, institutional participation, valuation mechanics, and regulatory framework of the secondary market. This content is educational and does not constitute financial or investment advice.
Legal Foundation: Why Policies Can Be Sold
The secondary market exists because life insurance policies are recognized as transferable property interests. The legal foundation dates back more than a century to Grigsby v. Russell, 222 U.S. 149 (1911).
In that decision, the U.S. Supreme Court affirmed that a life insurance policy is assignable property. A policyholder has the legal right to transfer ownership, subject to applicable laws. You can read the official case reference here.
This ruling established the legal groundwork for what later evolved into the modern life settlement market. Legality, however, does not imply an absence of regulation. Modern life settlements operate within structured state regulatory frameworks.
What Is the Secondary Market for Life Insurance?
The secondary market refers to the marketplace in which in-force life insurance policies are sold after issuance.
- In the primary market: Insurance carriers issue policies, and policyholders pay premiums.
- In the secondary market: Policyholders may transfer ownership to licensed providers. Institutional capital funds the acquisition, and investors receive the death benefit upon maturity.
This creates a market-based alternative to surrender or lapse.
Read More: How the Life Settlement Process Works
Capital Flow: How Money Moves Through the Market
Understanding capital flow is essential to understanding the market. A typical secondary market transaction may involve:
- Policyholder – initiates review
- Licensed Broker (optional) – represents seller
- Licensed Provider – purchases policy
- Escrow Agent – holds funds during transfer
- Institutional Capital Source – ultimately funds acquisition
In many cases, providers aggregate policies into portfolios funded by institutional investors. Capital may be structured through funds or private investment vehicles. The policyholder interacts with the broker/provider layer, while behind that layer is capital raised through structured investment mechanisms.
This layered structure distinguishes regulated life settlements from informal private transactions.
Who Buys Life Insurance Policies?
Policies in the secondary market are typically acquired by:
- Licensed life settlement providers
- Institutional asset managers
- Pension funds
- Alternative investment funds
- Insurance-linked securities (ILS) managers
These investors treat life settlements as a mortality-based alternative asset class. They do not “bet on individuals.” They allocate capital based on actuarial portfolio modeling, usually pooling policies into diversified portfolios to manage longevity risk.
How Do Life Settlement Investors Make Money?
Investors evaluate expected return using actuarial and financial modeling. The simplified economic equation is:
Expected Death Benefit
minus
Projected Premium Payments
(discounted to present value and adjusted for risk)
If projected returns meet required yield thresholds, capital is deployed.
Key variables include:
- Life expectancy projections
- Discount rates
- Interest rate environment
- Carrier credit strength
- Premium structure
- Portfolio diversification
Returns are driven primarily by mortality experience rather than stock market performance. This is why life settlements are often categorized as non-correlated, long-duration alternative investments.
How Are Policies Priced in the Secondary Market?
Pricing is based on discounted cash flow modeling. Buyers evaluate:
- Independent life expectancy reports
- Policy premium schedules
- Internal rate of return targets
- Risk-adjusted discount rates
Interest rate environments influence discount rates. Higher interest rates may increase required yields, which can affect pricing. Carrier credit rating also matters; the financial strength of the issuing insurer affects perceived risk.
This institutional valuation process differs significantly from surrender, where payout is determined solely by the carrier’s internal cash value calculation.
Read More: Surrender vs. Life Settlement: Key Differences
Portfolio Structure and Risk Management
Institutional investors typically do not purchase single policies as standalone investments. Instead, policies are:
- Aggregated
- Diversified by age and health profile
- Structured into investment vehicles
- Monitored for actuarial performance
This diversification helps manage longevity risk — the risk that insured individuals live longer than projected. Mortality experience is analyzed across the portfolio level, not the individual level.
Market Size and Institutional Presence
The life settlement market represents billions of dollars in face value annually, though it remains small relative to broader capital markets.
The U.S. Government Accountability Office (GAO) has reviewed the industry and confirmed that oversight occurs primarily through state insurance departments.
Regulation of the Secondary Market
The secondary market is regulated primarily at the state level. The National Association of Insurance Commissioners (NAIC) developed the Life Settlements Model Act to promote uniform consumer protection standards.
Regulatory safeguards typically include:
- Broker and provider licensing
- Disclosure requirements
- Rescission rights
- Privacy protections
- Anti-fraud enforcement
Read More: Are Life Settlements Regulated?
What Risks Exist in the Secondary Market?
While structured and regulated, the market involves risks for policyholders, including:
- Permanent loss of death benefit
- Tax implications
- Public benefit eligibility impact
- Irreversibility after rescission
- Market-based pricing variability
Read More: Risks of Selling a Life Insurance Policy
Frequently Asked Questions
What is the secondary market for life insurance?
It is the marketplace where existing life insurance policies are sold to licensed third parties after issuance.
Is the secondary market legal?
Yes. Transferability of life insurance policies has been legally recognized since 1911 and is regulated primarily at the state level.
Are life settlements considered an asset class?
Yes. Institutional investors often treat life settlements as a mortality-based alternative asset class with long-duration characteristics.
Do investors “bet on death”?
Investors rely on actuarial modelin