Life Partners will turn life insurance policies into bonds

Life Partners Holdings Inc., based in Waco, Texas, has unveiled a plan to buy life insurance policies from healthy seniors and transform the contracts into 10-year bonds to be sold to investors.

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"They need the cash today vs. tomorrow for some immediate need."

Michael Beste, president of the Life Partners' institutional investment division, expects the new sales operation to be up and running by late November or December.

Life Partners is a viatical and life settlement broker. A viatical is a contract in which a terminally ill policyholder sells his or her life insurance policy to an investor. The investor pays the premium on the policy and collects the death benefit when the seller dies. The deal is usually arranged by a viatical broker, who links terminally ill policyholders with investors looking to buy a policy. Life settlements are similar in nature, but they involve the life insurance policies of seniors rather than the terminally ill.

People who sell their policies "don't need the coverage any more and don't pay increasing premiums," Beste says. "They need the cash today vs. tomorrow for some immediate need."

Beste says Life Partners has a "strategic alliance" with an investment firm that specalizes in "securitization," which is the transformation of assets into investments. The firm, which Beste would not name, has provided Life Partners with a $100 million line of credit to buy life insurance polices from healthy seniors aged 70 or older. Included in that line of credit is money that will be used to pay policy premiums.

Beste says his company will buy life insurance policies with a minimum face value of $500,000 and a maximum of $5 million. The amount a policyholder would receive depends mostly on life expectancy. Life Partners will use actuarial data to show how long a person has to live. The longer a policyholders has to live, the less he or she will receive for the policy because the trust company must pay more in premium to keep the policy in force. He says that Life Partners will not buy policies from people who have a life expectancy of longer than 10 years.

After the policies are purchased, the investment firm will transform the assets into bonds that will mature and pay out in 10 years. The bonds will be sold on the open market.

To minimize the possiblity of fraud or high risk to investors, Life Partners Holdings will not purchase policies that are still under the two-year contestibility period and will only buy policies issued from insurers rated "A" or higher by Standard & Poor's or A.M. Best, two insurance ratings firms. (Visit Insure.com's Insurance Company Guide for insurance company ratings.)

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