Life settlement market could increase the flexibility of the financing choice of retirees. A life settlement is a transaction in which a life insurance policy owner (the retiree) sells a policy to a third party (Hedge Fund). The buyer (Hedge Fund) pays all subsequent premiums to the life insurance company and receives the net death benefit (NDB) of the policy at its maturity. Suppose the insurance premium is 10000 HKD per year, and the net death benefit is 1 million HKD. The market rate is 10%. In terms of cash flows, for the buyer, a life settlement is a negative coupon bond with uncertain maturity.

1. Suppose in the market half retirees would die 10 years later, and half retirees would die 20 years later, what is the market value of a life insurance contract?

2. Suppose all sellers would die 10 years later, what is the market value of the life insurance contract? What is the market value if all sellers die 20 years later?

3. In the real world, it is the retirees decision to sell his life insurance contract. Suppose the hedge funds charge the market value of a life insurance contract as in question b. If the retiree knows that he is pretty healthy (so he is more likely to live for 20 years), would he sell his life insurance contract? How about the retirees that think they are not in a good condition?

4. Many Hedge funds trading in the life settlement market promote their business as a way to improve longevity. The key evidence is that retirees who trade in the life settlement market on average lives longer than the total population. Based on your analysis in question 3, what is your opinion on their marketing statements?