The ESG case for life settlements

Life settlements draw a strong ethical reaction from some investors. The most common formulations are familiar: "betting on death," "death bonds," "profiting when someone dies." The reaction is understandable. Life insurance is a product designed around mortality, and an investor purchasing a policy is, in some literal sense, acquiring an asset that pays out when the insured passes away.

This article takes the ethical question seriously. The goal is neither to dismiss it nor to assume it away. Some investors will conclude, after careful consideration, that life settlements are not for them; that conclusion deserves respect. The aim here is to lay out what the asset class actually does, how its economics actually work, and how it performs against each pillar of the ESG framework — environmental, social, and governance — so that any conclusion an allocator reaches is reached on the basis of an accurate picture.

The objection, stated fairly

The strongest form of the objection is something like this: a life settlement buyer acquires a financial asset whose ultimate cash flow is contingent on the death of a specific person. The buyer pays premiums while that person is alive and collects the death benefit when they pass away. The faster the insured dies after the policy is acquired, the higher the buyer's return. There is something uncomfortable about a financial arrangement in which the timing of a human death is a determinant of investment outcome.

This is the objection in its most honest form. It is worth engaging with seriously rather than waving away.

The seller's perspective

The starting point for any ethical analysis is the position of the policyholder before the life settlement market existed. Permanent life insurance — whole life, universal life, and similar products — is designed to be held for the insured's lifetime. But circumstances change. Children grow up and become financially independent, eliminating the original purpose of the policy. Estate planning needs evolve. Business interests change. Premiums become burdensome in retirement. The policyholder may simply prefer the cash to the coverage. In all of these cases, the policyholder owns a valuable asset they no longer need.

Before the life settlement market matured, that policyholder had two options. They could surrender the policy to the carrier for the cash surrender value — typically a small fraction of what the policy is economically worth at that stage of the insured's life. Or they could let the policy lapse and receive nothing. Either way, the carrier retains the difference between what the policy is worth to a third party and what the policyholder is paid.

The life settlement market creates a third option. The policyholder can sell the policy to a licensed buyer at a market-determined price. Industry research, including data published by the Life Insurance Settlement Association (LISA) and academic studies of the secondary market, has consistently shown that policyholders receive multiples of the cash surrender value through the secondary market. Some industry sources report figures in the range of four to eleven times surrender value, depending on the policy and the underwriting profile. LISA's reporting of 2023 industry activity indicated that policyholders received approximately $842 million in proceeds from settled transactions, representing roughly $707 million of additional value compared with the surrender or lapse alternatives those same policies would otherwise have faced.

Academic research has examined the welfare effects of secondary life insurance markets as well. Peer-reviewed work has documented that the existence of a life settlement market improves expected welfare for policyholders, including welfare improvements for the subset of policyholders who never end up selling, because the option value of secondary-market liquidity itself raises the value of holding the policy in the first place. Research published in journals including the Journal of Economic Theory has examined how the life settlement market interacts with insurance carrier pricing, particularly in markets with overconfident or imperfectly informed consumers.

The simple statement of the case for the seller, then, is this: the existence of the secondary market means that policyholders who no longer want their policies receive materially more value than they otherwise would. That additional value is often paid to older Americans on fixed incomes, at a stage of life when liquidity matters.

Why "we benefit when they die" misrepresents the economics

The phrase "the investor benefits when the insured dies" is technically correct in a narrow accounting sense and substantively misleading about the economics of the asset class. Three observations make the misrepresentation clearer.

First, the decision that the policy is no longer wanted has already been made before the investor enters the transaction. The investor's role is to provide liquidity for an asset the policyholder has already chosen to monetize. The policyholder is better off after the transaction than before, regardless of when the underlying mortality event eventually occurs.

Second, the timing of the mortality event is determined by factors entirely outside the investor's influence. The investor does not select the insured, does not have any interaction with the insured beyond receiving redacted medical records for underwriting, and has no ability to accelerate or delay the underlying mortality outcome. The investor is, in financial terms, exposed to a probability distribution — not a person.

Third, the accurate frame is that the investor provides liquidity at fair market value for an asset the policyholder no longer wants, and is compensated for accepting the risk that the actual mortality timing will differ from the modeled distribution. If actual mortality occurs earlier than modeled, the investor's return is higher than expected; if it occurs later, the return is lower. The investor accepts this two-sided risk in exchange for the discount in the purchase price. This is the same economic logic that applies to any insurance-linked asset or to longevity-linked annuities (where the investor's return is in fact higher when the annuitant lives longer).

Aligned, not adversarial

A useful reframing of the buyer-seller relationship is that the parties' interests are aligned rather than adversarial. The seller wants the highest possible price for an asset they no longer need. The buyer wants to acquire policies at prices that compensate for the assumed risk. Both parties are made better off by the transaction relative to the counterfactual in which the policy is surrendered or lapses. The carrier is largely neutral — the policy was already in force; the secondary sale changes the identity of the beneficiary but not the underlying contractual obligation.

There is no zero-sum dynamic of the kind that ethical objections typically envision. The asset class is not a market in which one party gains at the expense of another; it is a market in which both parties are better off than they would have been in the alternative.

How the asset class performs against ESG criteria

Beyond the basic ethical question, it is worth examining how life settlements perform against each pillar of the ESG framework as practiced by institutional investors.

Environmental

The direct environmental footprint of holding life insurance policies as an investment is effectively zero. There are no operations, no emissions, no resource extraction, no land use. The indirect footprint, through the operational activities of fund administrators, custodians, and other service providers, is modest and consistent with the footprint of most asset management activities. Compared with categories such as direct real estate, energy, or operating companies, the environmental dimension is functionally a non-issue.

Social

On the social dimension, the asset class delivers measurable economic benefit to selling policyholders — frequently older Americans on fixed incomes — by giving them access to liquidity at fair-market pricing they could not otherwise obtain. The benefit is concentrated among a demographic for which incremental liquidity tends to be particularly useful. The asset class also helps preserve coverage capacity in the life insurance market by enabling efficient recycling of policies that would otherwise lapse, which arguably contributes to a more functional insurance system overall.

One reasonable critique is that the social benefit accrues to a relatively narrow population (policyholders who own permanent life insurance and reach the age at which a settlement becomes economically relevant) and that this population is not, in aggregate, the most disadvantaged. That is fair as far as it goes. The asset class is not a vehicle for poverty alleviation. It is a market that produces measurable economic benefit for its participants, who are typically middle-class and upper-middle-class older Americans monetizing an asset they no longer need.

Governance

The governance pillar is where life settlements perform particularly strongly. The market is comprehensively regulated at the state level, with statutory frameworks built on the NAIC Viatical Settlements Model Act (originally adopted in 1993, revised in 2007 and subsequently) and the NCOIL Life Settlements Model Act (most recent readoption in 2019). State statutes require licensing of providers and brokers, detailed disclosures to policyholders, rescission rights, privacy protections, anti-fraud provisions, and ongoing examinations.

Compared with many alternative asset classes, the regulatory framework is unusually mature. Selling policyholders receive standardized disclosures and have a statutory right to rescind. Brokers owe fiduciary duties to the seller. Providers and brokers are licensed and subject to background checks and financial responsibility requirements. The Actuarial Standards Board has issued Actuarial Standard of Practice (ASOP) No. 48 specifically governing mortality assumptions and analysis for life settlements, providing professional standards for the technical work that underpins the market. These layers of regulation, professional standards, and contractual protection together produce a market with relatively few of the governance gaps that ESG-conscious investors typically worry about.

A comparison to ESG-branded products generally

It is worth a brief comparative note. Many ESG-branded products in public markets have been criticized for delivering modest ESG impact alongside conventional financial exposures. The reasons are well-rehearsed: large companies tend to score well on quantitative ESG metrics by virtue of having sophisticated reporting functions, sector tilts can dominate underlying scoring, and the relationship between ESG scores and actual environmental or social outcomes is often loose.

Life settlements are not an ESG-branded product. The asset class predates the modern ESG framework and is not marketed as a sustainability strategy. What we can say is more modest: when the asset class is examined against the same criteria applied to ESG-branded products, it performs respectably on each pillar, and the social pillar in particular involves a concrete, measurable benefit to identifiable participants. Whether that meets a given investor's threshold for ethical comfort is, of course, a personal judgment.

The honest limits of the case

It is worth being explicit about what the ESG case for life settlements does not claim.

• •The asset class is not a vehicle for transformative social impact. It produces real, measurable benefit for a specific population (selling policyholders, frequently retirees), but it is not designed to address structural problems in healthcare, retirement security, or wealth inequality.
• •The environmental benefit is essentially the absence of environmental harm rather than a positive contribution. This is appropriate for a financial asset, but it is not a story about decarbonization.
• •The governance case rests on regulated counterparties and statutory protection, not on any unusual feature of the underlying investment strategy itself.
• •Some investors will still decline the asset class on principle, despite all of the above. That choice should be respected. The ESG framework is not the only ethical framework, and not every investor's discomfort can or should be resolved by the strongest analytical case for the asset class.

A note on terminology

The popular press occasionally uses the phrase "death bonds" to describe institutional portfolios of life settlements. The phrase is colorful, but it is misleading in a specific way: a bond is a fixed-income instrument whose principal cash flow is a contractual interest payment. A life settlement is not a bond. Its cash flows are mortality-linked, not interest-linked. The conflation has confused more than it has clarified. We prefer the more accurate terminology used by industry trade groups and regulators: life settlement, life-insurance-linked asset, or insurance-linked investment.

A short closing

The case in favor of the asset class on ethical grounds is straightforward when stated clearly. Selling policyholders are better off; investors are compensated for risk transfer; the regulatory framework is mature; the underlying transactions are voluntary, disclosed, and consented to by all parties. The case against, in its strongest form, rests on a discomfort with the idea of mortality-linked cash flows that is not entirely answered by any economic argument. That discomfort is legitimate. Investors who feel it strongly should not hold the asset class.

For investors who can engage with the asset class on its actual economics, life settlements present a respectable picture against ESG criteria. The category is not a sustainability hero, but it is also not the moral hazard that the most charged framings suggest.