For decades, investors have heavily relied on the classic 60/40 portfolio rule to guide their investments. However, today’s higher interest rates, stubborn inflation and ongoing stock market volatility are changing the rules. This has opened the door for life settlements as alternative investments because they’re an excellent hedge against market volatility.
If you’re new to non-correlated investment opportunities, read on for an in-depth look at how more investors are incorporating life settlements into their portfolios and why they’re worth considering.
WHY LIFE SETTLEMENTS BELONG IN THE DIVERSIFICATION CONVERSATION
A life settlement is when an investor buys an in-force life insurance policy from the policyholder. It’s a win-win for both parties: The insured, often a senior, gets a lump sum payment that’s typically four to seven times higher than if they surrendered the policy, and investors get a death benefit payout when the policy matures. The investor only needs to ensure the policy remains current.
Your life settlement investment’s performance depends mainly on when the insured passes — not on stock or bond market swings. That’s because, as non- correlated assets, these investments don’t directly lose value when economic markets experience a downturn.
This unique characteristic of life settlements is why so many investors are taking the route of life settlement investment diversification to smooth their portfolio’s returns.
4 PORTFOLIO BENEFITS OF LIFE SETTLEMENTS
More people are investing in life settlements due to benefits such as diversification, stability, yield and defensive qualities. Let’s look at each benefit in more detail below.
1. Diversification
Too often, portfolio investments depend primarily on investments that heavily rely on market performance. Life settlements add a non-correlated return stream that doesn’t behave the same as stocks, bonds or real estate. Having them in your portfolio expands the asset class mix, which helps spread out risk across the portfolio more effectively.
2. Stability
Life settlement portfolio stability is strong because returns are based on life expectancy outcomes, not directly on what’s going on in the economy. While a recession can cause traditional investments to lose value, a life settlement’s death benefit doesn’t change when stocks plunge. The full death benefit payout is going to be paid to the investor as long as they keep the policy current with premium payments and the insurance company is in business.
3. Yield
Investors commonly get annual returns of 11% to 13% with a life settlement investment. However, life settlement returns for investors can be much higher — even 800% or more when a policy matures earlier than estimated.
4. Defensive Qualities
Life settlements have shown resilience during recessions and other economic cycles because their returns are based on when the policy matures, not market happenings. Having them in a portfolio serves as a cushion when traditional assets lose value.
HOW INVESTORS ARE USING LIFE SETTLEMENTS
Life settlement portfolio stability can be generated in various ways. Here are some high-level examples of how investors are doing this.
Family Office Alternative Investments
Ultra-high-net-worth individuals sometimes set up a private company, often referred to as a family office, to manage their own wealth.
Some family offices allocate a portion of their capital, such as 5% or 10%, into life settlements as part of their family office’s alternative asset investments. Even these small life settlement investments are enough to help reduce a portfolio’s volatility and work to preserve intergenerational wealth.
Life settlements can also help stabilize other family office investments, such as private equity, real estate or hedge funds.
Registered Investment Advisors (RIAs) Investments
RIAs are independent advisors who manage portfolios for high-net-worth clients and affluent individuals. RIAs’ life settlement portfolio suggestions are often made to people with retirement-focused portfolios.
For many older adults approaching retirement age, it can be nerve-racking to see stock or bond performance negatively impact their nest egg. Many choose to diversify their investment portfolio with life settlements for more predictable income streams and better peace of mind that they’ll have the financial readiness to retire at their desired age.
Institutional Investor Investments
Institutional investors are typically large organizations that manage and invest money on behalf of a group of people using a pool of capital. Insurance companies, pension funds and foundations are examples of institutional investors.
These organizations manage billions of dollars and must balance long-term obligations with market swings. By adding life settlements to investment portfolios, they create a pool of assets with steadier performance and attractive returns. This also helps institutional investors rely less on traditional markets for their returns.
WHAT INVESTORS SHOULD EVALUATE WITH LIFE SETTLEMENTS
When considering a life settlement investment, the most important aspects to evaluate are:
- Policy underwriting and longevity assumptions: Aggressive or unrealistic expectations can distort projections on returns.
- Diversification across policies: A diversified portfolio includes not only life settlements, but also a few or more policies that spread out risk with different ages and health profiles.
- Provider or fund manager track record: It’s important to do your homework when working with providers and fund managers. For example, some fund managers have been in the news in recent years for fraud or making up fake revenue.
- Liquidity considerations: Life settlements are generally considered illiquid assets. They work best for investors who intend to hold on to policies until maturity. Investors should be comfortable with the timeline before committing capital.
ADDING STABILITY THROUGH SMARTER DIVERSIFICATION
Life settlements may not be a fit for every investor, but for the right profile, they provide a hedge and a stabilizer. Investors who thoughtfully incorporate them can achieve smoother long-term performance in their portfolios.
The most successful portfolios have a mix of asset classes and include strategies to reduce their downside exposure. If you want to learn more about how investors are using life settlements as a diversification tool, connect with a trusted advisor like i2 Advisors. Together, we’ll explore opportunities that fit your portfolio strategy.