Life settlements are drawing more investor attention than ever as Baby Boomers—the largest generation by birth rate—are now between 62 and 80 years old. With many seniors looking to sell their life insurance policies, there’s a greater supply in the market, giving investors more selection and competitive pricing.
But as with any investment, life settlements have their benefits and tradeoffs. Let’s take a closer look at this type of investment and its pros and cons, so you can make informed decisions for your portfolio.
WHAT IS A LIFE SETTLEMENT? A QUICK REFRESHER
Back in 1911,the Supreme Court ruled that life insurance policies are personal property and can be sold like other such property.
Today, people may sell their policy for a lump sum in a viatical settlement if they’re terminally or chronically ill, or in a life settlement if they’re healthy and have a life expectancy of more than two years. The sale price of the policy is generally based on sophisticated actuarial calculations that weigh the policy’s face value against its life expectancy.
When an investor buys a life insurance policy through a life settlement, they become the new policyholder and are responsible for paying premiums and maintaining the policy in force. When the insured person passes away, the investor receives the death benefit.
KEY ADVANTAGES OF LIFE SETTLEMENTS
Now that you have a general understanding of how life settlements work, let’s break down their biggest advantages.
1. Benefits Policy Sellers
Many who sell their policies are seniors. They receive, on average, four to seven times more by selling their policy in a life settlement than by surrendering it. This provides significant liquidity to support retirement, cover medical expenses or pursue personal goals.
2. Benefits Investors
By adding life settlements to your portfolio, you gain access to an alternative asset with the potential for attractive returns. Life settlements have historically delivered average annualized returns of 11-13%. In cases where policies mature much earlier than anticipated, internal rates of return (IRR) can be 800-1,000% or more.
You can also feel good knowing you’re helping someone else; seniors will likely receive much more money from their policies by selling them to you than from their only other alternatives: canceling the policy, surrendering it or letting it lapse.
3. Non-Correlation with Traditional Markets
Unlike stocks, bonds and other traditional assets, life settlement returns are driven by mortality outcomes rather than interest rates, economic cycles or market volatility. This lack of correlation with the market can help insulate portfolios from broader market disruptions.
4. Data-Driven Risk Assessment
Medical underwriters produce independent life expectancy assessments using actuarial models that are continually refined and made more accurate as technology and AI advance. Investors have a quantifiable framework for evaluating each investment opportunity.
5. Portfolio Enhancement at Modest Allocations
Allocating as little as 5-10% of a portfolio to life settlements may meaningfully improve risk-adjusted returns. Buying policies with staggered maturity dates may also help create more predictable, stable cash flows.
CONSIDERATIONS AND RISKS OF LIFE SETTLEMENTS
While the advantages of life settlements are compelling, you should also consider the potential risks and limitations before committing capital.
1. Longevity Risk
One of the biggest risks is that a policy matures much later than expected. If that happens, a policy projected to have a 10-12% IRR can drop into the low single digits or even turn negative. No life expectancy estimate is ever a guarantee, no matter how advanced the actuarial models get.
2. Lack of Secondary Market
You can easily buy and sell traditional assets on public exchanges, but no such platform exists yet for life settlements. Finding another investor or private buyer can be tricky and might mean selling at a discount.
3. Ongoing Premium Obligations and Lapse Risk
You can only receive the death benefit on an active life insurance policy. That means paying monthly premiums and other ongoing policy costs to keep it in force, sometimes for years or decades. If the policy lapses, you could lose everything you’ve invested.
4. High Minimum Investment and Capital Commitment
You typically need to be an accredited investor to purchase a life settlement. You’ll also need enough upfront capital to buy the policy—sometimes around 20-30% of the face value—and have enough left over to keep paying premiums and still stay diversified.
5. Manager Selection Risk
You can buy life settlements directly or through funds. If you go the fund route, be sure to vet managers thoroughly. In recent years, several companies have faced regulatory action for fraud or false revenue claims.
You can reduce some of these risks by buying policies directly—either on your own or through a reputable life settlement advisory company. Some advisory companies offer a turnkey process that makes buying and managing life settlements much easier.
ARE LIFE SETTLEMENTS RIGHT FOR YOU?
If you want quick access to your capital, are uncomfortable with the uncertainty around death benefit payout dates or worry you might not always be able to meet ongoing premium obligations, other types of investments may be a better fit.
But if you’re an accredited investor looking for a long-term investment that isn’t directly tied to market performance, life settlements are worth considering. They can help diversify your portfolio and add more potential for stable returns. You’d also help seniors access the most value from their policy, giving them more opportunities to live their golden years on their own terms.
If you’re still not sure, an experienced life settlement advisor can help you figure out if life settlements are right for your portfolio goals. They can also work with you to build a diversified portfolio so that your returns don’t depend on just one life settlement policy.
Investing in this market isn’t a one-time deal with a “wait to see what happens” approach. Having a few policies diversified across ages, health profiles, carriers, policy types and maturity dates can help offset the risk of late maturities and create more predictable cash flow.
Reach out to i2 Advisors today to learn how we can help you evaluate policies, build a diversified portfolio and manage ongoing premium obligations.