Life Settlements
What is a Life Settlement?
A life settlement is the sale of a life insurance policy to an investor in exchange for a lump sum payment. The amount received by the policy owner is less than the death benefit, but more than its cash surrender value of the policy.
The investor maintains the policy – paying all policy costs and/or premiums. Thus, the investor receives the death benefit upon the demise of the insured.
A life insurance policy is a saleable asset no differently than a home or automobile.
Why Would Someone Want to Sell Their Policy?
There are many reasons why a policy owner may no longer want or need to retain their life insurance. Below are some common scenarios:
The need for cash to: pay for healthcare/long-term care, supplement their retirement, purchase a retirement home, fund grandchildrens’ educations, check off items on their “bucket list”
The need has gone away – their spouse has passed away, their children/heirs are self-sufficient, or the changes in the federal estate/tax laws
The life insurance policy premiums have become too expensive due to the age of the insured, improper funding, or lack of policy performance
For whatever reason, the owner of the policy realizes that they can turn their life insurance into a living benefit and receive a lump sum payment that they can utilize in their remaining years.
How Long Have Life Settlements Been Around?
In a 1911 Supreme Court ruling in the case of Grigsby vs. Russell, Justice Oliver Wendell Holmes Jr. ruled that life insurance contracts can be sold as an asset.
The Life Settlement market has been in existence for 20 years and is a top alternative investment.
“Viatical Settlements” became popular in the 1980s due to the influx of HIV/AIDS diagnoses. A viatical settlement refers to a terminally ill person with a life expectancy of 2 years or less.
“Life Settlements”, or “senior life settlements” refer to an elderly or unwell senior with a life expectancy of 3 to 15 years.
What Are the Advantages of Life Settlements for Investors?
- Attractive returns – double digit interest rates with no loss of principle
- Non-correlated asset – returns are not tied to external factors such as the stock market, interest rates, housing market, or political environment (low volatility). In other words… No Market Risk.
- Regulated industry – the life settlement industry is regulated in 45 states
- Quality asset – policies are backed by America’s oldest and most financially sound life insurance companies
- Fixed dollar return – The dollar yield to insured’s life expectancy is known before the investment
- Custodial accounts are available to convert your current qualified retirement plan
- Offers a lower risk (lower return) diversification to your portfolio
- Life Settlements Create Win-Win Opportunities – Life settlements are win-win opportunities because both the buyer and the seller come out on top
- Your Success Doesn’t Depend on Someone Else’s Management Skills – This might be the biggest reason your financial adviser isn’t talking to you about life settlements. Once you invest in life settlements, there aren’t really any more decisions to be made, other than whether you want to expand your life settlement portfolio or sell to other buyers. The only variable for which you have to account is time.
Cons of Life Settlements for Investors?
- Longevity – the insured may exceed their life expectancy
- Lack of liquidity – the funds will be tied up in the investment until the policy matures
- Credit risk – the possibility that an ‘A’ rated life insurance company would not pay a death claim
Why Haven’t I Heard of Life Settlements?
Most financial advisors are not aware of alternative investments. If he/she works for a brokerage firm, the types of investments sold are limited to what the brokerage firm offers. Some financial advisors are not allowed to participate in alternative investment options. In addition, due to their broker-dealer restrictions, they do not have an understanding of the market due to their lack of participation. Wall Street does not want you to know about a little known asset class known as life settlements.
How Can I Participate in a Life Settlement?
Option 1: Direct Purchase – You must be an accredited investor to participate in this option. This option may be the most efficient in terms of costs; however, life settlements require an analysis by an expert. You want to have an expert assist you with the process. It is NOT a ‘do-it-yourself’ project. Minimum Investment: $15,000 (this amount can vary depending upon the death benefit amount of the policy and the life expectancy of the insured)
Option 2: Direct Fractional Shares – You must be an accredited investor to participate in this option. A large policy is divided into smaller portions and sold individually to several investors. Each investor owns a portion of the policy. This can also be done with several policies. Minimum Investment: $25,000
Option 3: Private Equity Fund – You must be an accredited investor to participate in this option. This option allows you to purchase a portion of a fund comprised of hundreds of policies – a great strategy for diversification purposes. Minimum Investment: $250,000+
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