Life settlements let investors buy an existing life insurance policy at a discount and collect the death benefit later. They’ve historically delivered steady, non-market-correlated returns, and demand for them is growing as more investors look for alternatives to traditional assets.
But the quality of a life settlement investment relies on choosing the right policy and working with a reputable provider. This guide explains how to begin evaluating life settlement investments, from analyzing the policy and the insured’s health to assessing risks and vetting providers.
WHAT MAKES A LIFE SETTLEMENT ATTRACTIVE AS AN INVESTMENT
Life settlements offer features that set them apart from traditional investments. Investors buy policies for less than their face value, creating the potential for strong returns when the death benefit is eventually paid.
Life settlements also have no direct ties to stock or bond performance. Returns are primarily driven by life expectancy, which creates a measurable and model-based outlook rather than one based solely on market speculation.
Investors with a portfolio that includes several policies can also see steady cash flows. Because policies mature at different times, payouts are staggered, making income more predictable compared with relying on a single contract.
Beyond performance, investors help seniors get four to seven times more for their policy than surrendering. That’s money they can use to cover pressing needs or enjoy their golden years.
EVALUATING LIFE SETTLEMENT INVESTMENTS: KEY POLICY FACTORS
When reviewing a life settlement opportunity, the policy itself is the starting point. Not all policies carry the same risk or return potential, so it’s essential to look closely at the details.
Careful life settlement investment due diligence includes reviewing the:
- Policy type: Universal life, whole life and convertible term policies are the most common in life settlements.
- Face value and cash surrender value: The face value sets the ultimate payout, while the surrender value influences the minimum the seller may be willing to accept.
- Premium structure: Premiums may stay level, rise over time or already be paid up so that no further payments are needed. Since you’ll take on premium responsibilities, this is vital information.
- Carrier rating: The financial strength ratings of the insurer matter for long- term stability.
- Policy sustainability: Premium payments should be manageable for your budget so the policy doesn’t lapse before the insured passes.
ASSESSING THE INSURED’S HEALTH AND LIFE EXPECTANCY
The insured’s health and expected longevity are the most important variables in a life settlement investment. They directly determine when the policy pays out and, ultimately, your rate of return. Here’s what to consider:
- Age and gender: Both play a significant role in longevity forecasts.
- Health impairments: Chronic conditions or major illnesses shorten life expectancy.
- Accuracy of underwriters: Look at the historical track record of the firms preparing the reports.
Investors usually get life expectancy reports from specialized independent underwriters, and sometimes they order two reports to compare results since even slight differences can affect returns.
EVALUATING THE INVESTMENT STRUCTURE
You can approach analyzing life settlement opportunities in different ways, but most individual investors seek to build a small portfolio.
Factors to weigh include:
- Liquidity timeline: With direct ownership, investors receive the full death benefit when the insured passes. While the exact timing is uncertain, the payout can be significant.
- Diversification: Holding several policies spreads risk and helps smooth returns compared with relying on just one outcome.
- Premium obligations: Policy owners must keep paying premiums until maturity, so it’s important to plan for those costs.
- Control and transparency: Direct ownership gives investors full visibility into the policy and the ability to track performance closely.
Pooled funds are another way to participate, but they require extra scrutiny. Without thorough due diligence, you may have less control and less clarity about how your money is managed.
DUE DILIGENCE ON THE FUND OR SPONSOR
Even the strongest policy can underperform if you skip proper due diligence. Part of evaluating life settlement investments is making sure the provider sourcing it or the sponsor overseeing it is trustworthy. Some fund managers in the industry have faced lawsuits in recent years for misleading investors or mishandling assets.
Before you commit capital, take time to vet who you’re working with. You’ll want to look closely at your provider or fund sponsor’s:
- Licensing and regulation: Confirm the firm is licensed to operate and in good standing with regulators.
- Experience: Look for a history of sourcing policies or, in the case of a sponsor, managing life settlement investments successfully.
- Transparency: Expect clear disclosure on fees, policy selection practices and reporting (especially from sponsors).
- Third-party servicing: Premiums, death claims and administration should be handled by established independent servicers.
- Red flags: Be wary of excessive fees, vague reporting or life expectancy assumptions that seem overly optimistic.
A strong sponsor will be able to show audited results, share references from past investors and explain how they stay compliant with regulations. Ultimately, you want to be confident they can manage the investment reliably.
RISK FACTORS TO UNDERSTAND
Life settlements can offer attractive returns, but like any investment, they come with risks. When conducting a life insurance investment risk assessment, you’ll want to look at:
- Longevity risk: If the insured lives longer than expected, your returns are reduced.
- Liquidity risk: Capital can be tied up for an uncertain period, since payouts depend on life expectancy.
- Regulatory risk: State-level rules may change, potentially affecting how settlements are handled.
- Operational risk: Poor policy servicing, missed premium payments or weak administration can hurt performance.
Understanding these risks up front allows you to plan for them. You can diversify across investments, choose pooled structures or work only with experienced providers.
REDUCING RISK: BEST PRACTICES FOR INVESTORS
While no strategy can eliminate all risks in life settlements, investors can take practical steps to lower exposure and protect their returns.
Diversification is one of the most effective tools. Spreading money across several policies or asset classes helps reduce the impact if one policy underperforms. Independent underwriting is equally essential. Using reputable third-party firms to verify life expectancy reports provides a more reliable basis for projections.
Transparency is another safeguard. Before investing, request clear information on fees, sourcing methods and past performance.
Finally, confirm that the provider or fund follows all state requirements and, if relevant, SEC or FINRA rules. These checks can form the foundation of a sound life insurance investment strategy.
A NICHE ASSET WITH STRONG UPSIDE — IF YOU CHOOSE WISELY
Life settlements are an alternative investment that offers steady returns and a way to diversify beyond traditional markets. Annual returns typically fall in the 11% to 13% range and occasionally, investors see 800%+ gains when a policy matures earlier than expected.
For investors exploring how to invest in life settlements, the opportunity lies in combining disciplined due diligence with smart diversification. Investors who take time to understand the investment structure, weigh risks and work with trusted partners are better positioned to benefit from this growing market.
Looking to evaluate a life settlement opportunity or learn more about investing in this space? Connect with our team to review current offerings or receive a personalized policy analysis.