A Life Settlement Fund (LSF) is similar to any professionally managed Mutual Fund; the only difference is that unlike Mutual Funds a LSF is created by securitization of many complete or fractional Life Settlement Policies for individuals. If the individual associated with the policy dies, then the LSF files a claim with the policy issuer to get the money.

The LSF securitizes the policies and converts them into shares which are further sold to investors who become the shareholders.

Any LSF has the following independent service providers who take care of the fund:

1.       Fund Administrator: A person or organization that provides periodic financial and accounting reports and customer service to the shareholders.

2.       Auditor: An independent 3rd party that verifies and validates the reported performance with the actual performance.

3.       Legal Counsel

4.       Investment Manager: The person who selects the Life Settlement Policies and keeps track of the individuals the policy is associated with.

5.       Custodian: Typically a bank that is responsible for holding the fund assets (i.e. the policies) in safety.

Ownership of the Policy - Independent Investor vs a Life Settlement Fund:

An independent investor has an option of buying a complete policy or a fraction of a policy. By buying multiple fractional policies an investor is able to diversify the risk of default on any individual policy. But in any case the investor is totally dependent on the broker for any transactions. These brokers are not regulated and therefore could be licensed or unlicensed. This puts all the responsibility of conducting due diligence of the policy onto the investor, who must then monitor to ensure that regular payments are being made against the policy. Many investors are either not sophisticated enough to do so or do not have enough resources and time to do so. This increases the risk associated with these independent policy purchases.

On the other hand, the LSF securitizes and converts the policies into shares which clearly diversify the risk associated with the individual policy default. The LSF also invests in policies from many insurers and further mitigates the risk of any insurance firm defaulting on their policies. A LSF has a sophisticated Fund Manager who would not only make a better judgment in choosing and managing the policies, but is also monitored by the Auditor, Legal Counsel and Custodian to ensure regulatory compliance.

Key Factors associated with a LSF:

Life Expectancy Estimates: The value of any Life Settlement policy is dependent upon the life period of the individual that the policy is associated with. LSFs either have an in-house staff or coordinate with an independent medical examiner to determine these estimates. The accuracy of these estimates would determine the accuracy of the value of the policy.

Fund Management Fee: The investors in a policy have to keep track of and make sure that the policy does not lapse. This is done by the fund manager. Therefore, a fund manager is paid a fund management fee to ensure the quality of the LSF.

Regulatory Compliance: An individual policy is not considered a security and hence does not have many regulatory restrictions. But a LSF is sold as shares and thus is required to meet regulatory compliance. This helps to mitigate the risk to unsophisticated investors.

Risk to Reward: Since the LSF has lower risk than an individual policy, the expected reward is also lower.