Life Settlements and Viaticals

Life, Sex and Death taken from the Second Edition of Paul Wilmott On Quantitative Finance

In this chapter…

• life
• sex
• death

1 Introduction

And now for something completely. . .morbid. Life settlements and viaticals are contracts associated with death. The two expressions can be used interchangeably, although ‘viatical’ is often  associated with a life with an already diagnosed terminal illness. With these contracts expiration means precisely that. Life settlements are a secondary market for the life insurance policies held by individuals. These individuals may, typically later in life, want to sell their policy. The common reasons are

• they can no longer afford to pay the life-insurance premium,
• as part of estate planning,
• they need the money to pay for medical treatment,
• they no longer need the life insurance.

The policy is usually worth a lot more than its surrender value. Many of these life insurance policies are then usually packaged together and sold as one product. To the quant, the question is how to model and price, and hedge, individual policies and portfolios of policies.

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