November 16, 2018
As a general matter, investors in life settlements are “institutional” investors – that is, sophisticated investment funds that are professionally managed. The typical investors include private equity funds, pension funds, specialized life settlement funds, family offices, and hedge funds. These investors are interested in life settlements for many different reasons, but some of the more common reasons fall into a number of categories:
- Non-correlated asset. Life settlements are considered a “non-correlated” investment due to the fact that the investment returns are not related to and do not fluctuate with typical investment products (stocks, bonds, real estate). The main factor in determining the investment return in life settlements is mortality assumptions and the ability to accurately project such assumptions and invest in an adequately sized and diverse pool of life settlements. A typical “correlated” investment fluctuates with the stock and bond markets based on the economic environment – interest rates, inflation, unemployment, etc.
- Relatively high investment returns. Investors find that the potential investment returns in life settlements is higher relative to other investment opportunities with a similar risk profile – essentially a fixed income/bond-like investment with significantly higher investment returns. In a life settlement investment, it is not a question of “if” the investment pays out, it is only a question of “when.” And when the time comes for a pay out, the ultimate counterparty is a highly rated life insurance company.
- Favorable demographic trends. The population of people 65 and older is expected to double by 2060, while this group’s percentage of the population will grow from 15% to 24%. The average number of years a person is expected to be retired has increased from 7 years (in 1935, when retirement was “invented” by the social security program) to 22 years in 2015. The greater pool of potential life settlement candidates offers a clear potential for an increasing market size.
- Highly regulated industry. Life settlements are a now a highly regulated industry. Life insurance is regulated at the state level, and, currently, 43 states regulate life settlement transactions. These regulations protect both policy sellers and investors to ensure that the title is properly transferred from seller to buyer at the time of the sales transaction. In its early days, life settlements were loosely regulated. With the increased regulation, has come increased transparency and a better marketplace.
It is important to point out that for the thesis to perform, the life settlement investor must aggregate a sizeable portfolio of policies. The larger the portfolio, the more likely the estimated performance of the portfolio will perform in line with such expectations. As a policy seller, this is also important to understand as the policies being sold are part of a much larger investment strategy.