But that may not be a major concern, at least for now. Earlier this year a tide of bills containing the five-year rule swept into statehouses across the land. Few became law. Forster says, "The NAIC model has largely met with resistance from the states, and the important ones-New York, California, Florida-all have refused to pass it, seemingly because they believe it is anti-consumer and solely for carrier benefit." Then again, legislatures reconfigured by this fall's elections could harbor different sentiments next year.

At least one other risk to consider is how the policy was originated and funded. Bakal says, "The market is discriminating against policies that weren't originated by the insured herself. They are worth less in the marketplace, if you can sell them at all." This includes contracts purchased with 100% non-recourse financing and in so-called "beneficial interest" deals, where individuals bought insurance through trusts and then immediately assigned their trust interests to investor groups.

Policies originated in these and other ways that insurers view as inappropriate bear rescission risk-the possibility that the carrier may refuse to honor the death claim. This is real. Lawsuits are in full swing. "The carriers are arguing there was not an insurable interest at the time the policy was originated," Bakal explains.

Forster adds, "The lawsuits are complicated and often involve many parties. The investors may only get back the premiums they paid-in other words, their initial investment with little or no interest-or they might get their premiums minus the commissions paid to the agent who sold the policy to the insured."
Investment Management Needs And Product Attributes

As products debut, expect little liquidity and high minimums. High fees, probably, too. Advisors of clients who are nevertheless game to play will have to determine how the various ways to invest-via funds, by acquiring individual policies such as with the Life Partners program, or through new-breed products like the much-anticipated Legacy Loan (see sidebar)-address important investment-management concerns.

Take achieving diversification. It requires harnessing the law of large numbers. In contrast to a portfolio of domestic equities, where perhaps 20 carefully selected stocks can provide adequate diversification, "you would need to invest in significantly more than 100 policies, depending on the insureds' age ranges and medical conditions, in order to expect to receive some death benefits in the near future," says Kiri Parankirinathan, president of Life Product Developers Inc., an insurance product manufacturer and actuarial consultancy with clients that include life settlement funders and financiers.

After policies are acquired, premiums have to be paid, claims for death benefits filed, and other administrative duties handled. Of course, who will maintain the contracts becomes an issue only after you've acquired them, which itself is quite the challenge.

"Successful institutional investors reject more than 90% to 95% of the policies they are presented," Parankirinathan notes. Finding the number and amount that's necessary for diversification after the wheat has been separated from the chaff requires access to a policy flow that is diverse, high-quality and substantial.

A critical part of investment selection is paying the right price. Policy valuation hinges on many factors-many more than we've discussed. Buyers of policies have to know how to account for all of them.

Investors who acquire policies directly, according to Bakal, "should work with a very sophisticated insurance advisor who can accurately value contracts using the (actuarially-based) Milliman pricing model." The insurance advisor also needs to be able to ascertain how the policy was originated, to mitigate your rescission risk, Bakal says.