Life Settlement Investments May Be One of Your Best Alternatives For Long Term Strategy
Although they have been around for nearly 20 years, life settlements have more recently become one of the most popular forms of alternative investments. For years, purchasing active, in-force life insurance policies has been a solid investment strategy for institutional investors, but now this same practice is available to the third-party investor, as well.
Purchasing life settlements as a form of low-risk investing started in the United States in the later part of the 1990s, and this unique form of investing became popular because of the possibility of high investment returns. It is a very different form of investing, especially when compared to traditional investments like stocks, bonds, and real estate, and life settlement investments have gained in popularity mainly because of the significant number of Baby Boomers reaching their golden years, as well as current volatility in the financial markets.
It became possible for a policyholder to sell their life insurance policy in 1911 when the Supreme Court ruled that a life insurance policy was personal property and could be sold accordingly. The AIDS epidemic in the 1980s led many people with very short life expectancies to sell their policies to pay for expensive medical treatment. This tragic era led to the industry becoming what it is today.
Life settlement investments benefit policyholders and investors. Before this type of investing, life insurance policyholders didn’t have very many options when faced with surrendering their life insurance policy. They were basically forced to surrender the policy back to the insurance company for a low price, and they also incurred fees, but now they also have the option to sell the policy to an investor. Investors offer more money for the policy than the insurance company’s cash surrender value.
For example, if a life insurance policy is worth $2 million, and the insured has been paying premiums for 5 years. They have likely paid around $250,000 into the policy. Now, if they surrender the policy, the insurance company is likely to pay out in the range of $0 to $75,000 (depending on the surrender charge), but if the policyholder were to sell the policy in the market, the policy could be worth around $400,000.
The policy owner or seller would receive a cash lump sum for the policy, and the investor would then be responsible for the premiums. However, upon the death of the insured, the investor would receive the benefits of the policy and receive the final payout of funds.
Selling Life Insurance Policies
It may seem odd that a person would want to sell their life insurance policy in the first place, especially after they have made a substantial number of payments. However, circumstances change and people suddenly find themselves unable to afford to make the premium payments. Generally, a person purchases a life insurance policy when their finances are in good order and the future outlook is sunny, but a sudden change in lifestyle, like loss of employment or catastrophic medical bills, can lead to an inability to afford the policy premiums.
There are many reasons why a person may choose to sell a life insurance policy that does not include a loss of financial security. It is possible that a person chooses to sell the policy because they no longer have a beneficiary to receive the policy after their eventual death, or their beneficiaries are independently wealthy and do not require the additional funds. Perhaps, they would like to sell off the policy and use the money while living to fulfill a travel dream, start a charity or make a significant charitable donation, or gift the funds to beneficiaries while they are still alive to see the impact.
Reliability: Life Settlements Vs. The Stock Market
Nearly all financial managers stress the importance of diversifying assets to their clients or as the old saying goes, “Don’t put all your eggs in one basket.” Financial managers recommend mixing aggressive but often volatile options like stock market investing with safer options like bonds or life settlements to round out a portfolio.
Investing in the stock market comes with three main risks: volatility, timing, and overconfidence. The market is subject to the whims of the world leaders and the rise and fall of economies. Plus, knowing when to buy and sell can make or break a portfolio. There is an inherent risk even when strictly dealing in low-risk stocks. One must be able to predict the future to truly make stock market investing low risk.
Factors Life Settlement Investors Should Consider Before Investing
On the other hand, life settlement investing is not affected by the market or the economy in general. The main risk is mortality and properly projecting the timing that policy benefits will be paid out and that the insurance company goes bankrupt before paying out on the policies. The risk of an insurance company bankruptcy is relatively low, however, because most of these institutions are unlikely to default. Projecting mortality and life expectancy is mitigated by investing in large, diversified portfolios. According to the Life Insurance Settlement Association, the industry is forecasting “an average annual gross market potential for life settlements of $180 billion from 2014-2023, with an average volume of approximately $3 billion per year in life settlement transactions.”
The Two Types Of Life Insurance Policy Transactions On The Secondary Market
The sale of a life insurance policy will fall under one of two types:
- Viatical Settlements: This is the sale of the owner’s policy to a third-party investor for less than its death benefit but for more than the cash surrender value. These sales are governed by state laws, and they are generally only done in a case where the policyholder is expected to have less than two years to live due to a chronic or a terminal illness. Most people sell their policies in this way to pay for needed medical treatment.
- Life Settlements: This is also the sale of the owner’s policy to a third-party investor. The investor will pay out a sum that is more than the cash surrender value but less than the death benefit. However, these policies are purchased from insured individuals that are over the age of 65 but do not have a known life-threatening illness and are expected to live 20 years or less. People generally sell their policies in this manner to use the money to rebalance their investment portfolios, live more comfortably or travel during their retirement phase of life.
Purchasing a policy, in either case, follows a similar process. In most cases, the policies are not purchased by a single investor, but by an investment company or life settlement fund that can spread the cost of the investment among a large pool of investors.
Life Settlements A Safe, Alternative Investment
Life settlements are a viable alternative investment that is a safe addition to a financial portfolio. They are long-term investments that are not affected by the fluctuating stock market or the political climate, and upon the maturation of the life insurance policy, they pay a decent-sized dividend.
Typical Lifespan For investments Such As Life Settlements
In general, the expected lifespan of the original policyholder is in the range of 2 to 15 years which means life settlements are a long game and not meant for a quick yield. Depending on the state you live in, sellers could face a 2-year waiting period before their policy is eligible to be sold, and some states even require a 5-year waiting period. A good financial manager, life settlement provider, or life settlement broker should be able to explain any waiting period laws required by the state of residence.