Life Settlement Investments
Life settlements investments may be one of your best alternatives for a long-term strategy. Although they have been around for nearly 20 years, life settlements have now become one of the most popular forms of alternative investments.
The History of Life Settlements
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.
The Safety of Life Settlement Investments
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.
The Lifespan of Life Settlement Investments
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. In most cases, 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.
In most cases, 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.
Types Of Life Insurance Investments
There are two types of policy transactions on the secondary market.
A Viatical Settlement 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 are 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, 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.
Surrender or Sell Your Life Insurance Policy?
Investors offer more money for a policy than the insurance company’s cash surrender value.
A $2,000,000 Worth $75,000
Life insurance policyholders didn’t have very many options when faced with surrendering their life insurance policy. They were often forced to surrender the policy back to the insurance company for a low price, and they also incurred fees. So, let’s say a life insurance policy is worth $2 million, and the insured has been paying premiums for 5 years. They have likely paid about $250,000 into the policy. 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).
Life settlement investments benefit policyholders and investors.
A $2,000,000 Policy Worth $400,000
Now policyholders also have the option to sell the policy to an investor. So, let’s say the insured decides to sell that same, $2 million life insurance policy, whose premiums have been paid for 5 years. They have still likely paid $250,000 into the policy. If the policyholder decides to sell the policy in the market, looking for the best deal and estimate, 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 Your Life Insurance Policy
There are many reasons why a person may choose to sell a life insurance policy that does not always include a loss of financial security.
Necessary Today, But Not Tomorrow
Generally, people purchase a life insurance policy when their finances are in good order and the future outlook is sunny. It feels necessary to have one just in case. But a sudden change in lifestyle can lead to an inability or lack of desire to afford to continue paying the premium. It’s never too late to consider selling your life insurance policy, if you find yourself in one of these situations.
You lose employment and need immediate funds.
A sudden job loss can be a significant loss of income. Selling a policy allows you to continue paying bills while you look for new work.
You incur catastrophic medical or other bills.
Even with savings and investments set aside for emergencies, medical and other bills can add up. Selling a policy can provide another source of cash when times are hard.
You no longer have an available beneficiary.
Some beneficiaries become unavailable due to death and some no longer require the windfall of an investment payout. Selling a policy puts the money back in your hands.
You want to use the money for something fun.
Some people want to use the money simply for travel, starting a charity, or gifting the funds differently. Selling a policy is a quick solution to gain income.
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.”
Life Settlement Investments and The Stock Market
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.
The Life Settlement Factor
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.” 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.
However, 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.”