Recent estimates show that life settlements have an average annual gross market potential of $224 billion and a projected annual volume of $4.6 billion. [1] Yet, despite their growing popularity, life settlements remain a misunderstood asset class. Persistent misconceptions and outdated information cloud investor judgment, causing many accredited investors to miss out on the unique benefits and attractive returns that life settlements have to offer.
Below, we separate fact from fiction on the most common misconceptions, helping you to make informed decisions about whether life settlements deserve a place in your investment strategy.
FICTION #1: LIFE SETTLEMENTS AREN’T A LEGITIMATE ASSET CLASS
In the early 1990s, the life settlement market didn’t have strong regulatory oversight. Returns were also unpredictable because of unreliable life expectancy estimates.
Today, the SEC and state securities regulators oversee life settlement investments under securities law. Forty-three states and Puerto Rico require licensure for life settlement brokers and providers, and that transaction documents, like contracts, disclosures and escrow agreements, obtain regulatory approval. [2]
Transparency is also a legal requirement. Most states mandate clear disclosures that allow consumers to understand how life settlements work, the risks involved and available alternatives.
FICTION #2: LIFE SETTLEMENTS RETURNS MOVE WITH THE STOCK MARKET
Life settlements are one of the few asset classes not directly tied to the stock market, bond market or interest rates. Returns are driven by actuarial calculations and the policy owner’s medical history rather than by typical market swings.
Independent underwriters use sophisticated analytical tools and AI to generate more accurate life expectancy reports. While no estimate is ever perfect, improved risk-and-return modeling allows you to assess risks, returns and costs with greater confidence. Annual returns on life settlements average 11% to 13%, but returns of 800% or more are possible when a policy matures much earlier than expected.
FICTION #3: LIFE SETTLEMENTS ARE A MORBID INVESTMENT
Some people perceive life settlements as morbid investments, since the death benefit is only paid when the insured passes away. By that logic, purchasing life insurance for yourself is also morbid, since beneficiaries only receive a payout when you die. In reality, most policyholders see life insurance as a responsible, caring way to provide for loved ones—not a morbid financial move.
A life settlement simply transfers ownership of the policy, allowing the seller to access its market value during their lifetime. As the investor, you assume responsibility for premiums in exchange for the eventual death benefit.
FICTION #4: LIFE SETTLEMENTS EXPLOIT SENIORS
Most seniors considering life settlements actively seek out brokers and investors. They aren’t approached unsolicitedly by someone knocking on their door or filling up their mailbox with flyers.
Seniors often view selling their policy as a calculated financial decision, especially for those on fixed incomes who no longer need coverage because their loved ones are financially secure. Most have already weighed the alternatives, such as canceling the policy, letting it lapse or surrendering it and see that a life settlement gets them the highest value on a policy they don’t want to keep anymore.
If they canceled the policy or let it lapse, they’d get nothing in return for the tens of thousands of dollars they’ve paid into the policy for decades. The other option, surrendering the policy, typically returns only a small fraction of its value. By selling through a life settlement, seniors usually receive four to seven times the surrender value, making it the most financially advantageous choice.
FICTION #5: A LIFE SETTLEMENT FUND IS SAFER THAN DIRECT OWNERSHIP
The appeal of life settlement funds is that they pool multiple policies, spreading out risk and reducing the impact of a policy maturing much later than expected. Larger portfolios can also smooth out returns, reducing the gaps between policy payouts.
However, you pay a premium for the predictability. Funds advertise returns of around 8% to 10%, but if a policy matures early, the fund retains most of the upside. Investors only receive the stated returns.
Investing in a fund also means letting a single company make all the key decisions, from selecting life expectancy reports and actuarial models to valuing policies and managing the portfolio. As an investor, you have little direct input into the policies you own.
You’re also entrusting your capital to the fund itself. Unfortunately, funds do not always live up to expectations. For example, GWG Holdings, a life settlement fund, filed for bankruptcy in 2022, resulting in $1.3 billion in investor losses. [3] In recent years, other funds have faced investigations for fraud or misrepresenting revenues.
If you choose to invest through a fund, it’s essential to do your due diligence to avoid falling for misleading claims about products and services.
FICTION #6: LIFE SETTLEMENTS ARE DIFFICULT TO MANAGE DIRECTLY
Some people go the fund route simply because they’re intimidated by the idea of buying directly. What many people don’t realize is that there’s a way for you to buy policies directly without having to go at it alone. Companies like i2Advisors offer turnkey solutions to help investors build and manage their own policy pools. Services can include:
- Overall consulting on life settlement investments
- Handling premium payments
- Processing claims
- Monitoring the insured’s status
- Meeting tax reporting deadlines and maintaining tax compliance
- Acting as a second addressee on policy communications to prevent missed notices and lapses
AN ASSET CLASS WORTH UNDERSTANDING
Life settlements are a non-correlated asset class that uses rigorous data to make educated decisions about returns. The industry is highly regulated, with transparency requirements that empower policyholders to make well-informed choices about their life insurance.
For seniors, life settlements offer a way to unlock maximum value from their policies during their lifetime. Investors also benefit because life settlements provide a unique opportunity to diversify with a non-correlated asset that can deliver competitive returns independent of market movements.
If you are interested in exploring life settlements further or want to discuss how they may fit into your portfolio, contact i2 Advisors for a complimentary consultation with a life settlement professional.