Many investors turn to life settlements for diversification and steady returns. Since these investments don’t move in step with the stock market, they can offer stability when other assets are volatile.
But economic conditions still matter. Interest rates, inflation and broader market trends can all influence how life settlements perform and how attractive they are to investors.
Let’s take a closer look at how life settlements respond to different economic cycles and life settlements, including how various factors affect performance and pricing.
HOW LIFE SETTLEMENTS BEHAVE DURING ECONOMIC CHANGES
Life settlement investment returns aren’t tied to stock market performance. Their value depends on longevity risk, which is based on how long the insured person lives, not on market conditions.
Why Life Settlements Hold Steady in Volatile Markets
Because they don’t move with the broader market, life settlements may offer more stability during economic downturns. For example:
- In the 2008 financial crisis, many life settlement funds remained stable while stocks declined sharply.
- In early 2020, at the onset of the COVID-19 pandemic, markets declined by more than 30%, and unemployment surged. Life settlements stayed far less volatile than traditional investments.
A Different Set of Risks and Rewards
That historical stability is a key reason investors use life settlements to diversify their portfolios. Earnings reports, interest rates and economic growth don’t drive returns. Instead, they follow a different set of factors, which can help reduce exposure to market swings and add stability to a long-term strategy.
WHY INTEREST RATES MATTER IN LIFE SETTLEMENT INVESTMENTS
Interest rates impact life settlements in how polices are priced. When investors purchase a policy, they estimate the future payout and apply a discount rate to calculate its present value.
The discount rate reflects the return the investor hopes to earn. When interest rates rise, investors increase the discount rate. That reduces the policy’s present-day value, meaning buyers are likely to pay less for it.
This can lower the price of newly issued policies and affect the expected returns on older policies bought when rates were lower.
Shifting Investor Preferences
Rising interest rates can also make other investments, like bonds, more attractive. As yields rise, some investors may shift away from alternative assets, such as life settlements.
Institutional buyers may also face higher borrowing costs. Since many use leverage to purchase policies, rising rates can lead to more cautious buying and lower demand overall.
Still a Long-Term Opportunity
Even in a higher-rate environment, life settlements may appeal to investors seeking long-term returns that aren’t tied to the stock or bond markets. The key is working with experienced managers who understand how to effectively navigate rate changes and price policies.
WHAT’S INFLATION’S IMPACT ON LIFE SETTLEMENT RETURNS?
Life settlement payouts are fixed. They don’t increase with inflation, even as the cost of living rises over time.
Inflation Can Raise Costs
While the return stays the same, inflation can make it more expensive to hold the policy. You may end up paying more for:
- Annual premiums
- Servicing fees
- Administrative or legal costs
These rising expenses can eat into your return, especially if the policy is held for many years.
A Source of Stability When Others Struggle
When inflation is high, traditional income investments, such as bonds or dividend stocks, may not keep pace. Life settlements investments aren’t tied to market performance, so they may help balance your portfolio when other assets fall short.
They aren’t a perfect hedge against inflation, but they can provide steady returns in a changing economy.
WHAT HAPPENS TO LIQUIDITY WHEN MARKETS SHIFT?
Life settlements are considered illiquid investments. Unlike stocks or bonds, you can’t sell them quickly or through a public exchange. If you need to exit early, you’ll likely need to find a private buyer. That can take time and may result in selling the policy at a discount.
Market conditions also matter. In a downturn, it can be even harder to find buyers, especially if other investors are pulling back. When stocks or bonds are doing well, you might also find fewer buyers interested in alternative assets like life settlements.
Because of this, life settlements are best for investors who don’t need quick access to their money. If you plan to hold the investment for several years, you’re more likely to benefit from the expected return.
WHY LIFE SETTLEMENTS CAN OFFER STABILITY IN VOLATILE MARKETS
One of the biggest benefits of life settlement investments is that they are non- correlated assets. They’re often viewed as alternative investments in volatile markets because they aren’t tied to stock or bond performance, making them attractive when the market is unpredictable.
Returns Aren’t Tied to Market Swings
Life settlement returns are based on the payout from a life insurance policy. They don’t depend on company earnings, stock prices or interest rate changes. That can help protect your portfolio when other investments are struggling.
A Source of Balance During Uncertainty
In times of market stress, life settlements may continue to deliver steady returns. They aren’t entirely risk-free, but they tend to be far less volatile than traditional investments.
That’s why some investors use life settlements to add balance and reduce overall risk in their portfolio, especially during periods of economic uncertainty.
WHAT TO CONSIDER BEFORE INVESTING IN LIFE SETTLEMENTS
Life settlements investments can be a valuable way to diversify your portfolio, especially during times of market uncertainty. They aren’t tied to stock or bond performance, and they may continue to deliver steady returns when other investments are under pressure.
But like any investment, they come with trade-offs. Life settlements are illiquid, sensitive to interest rate shifts and depend on accurate life expectancy estimates. That makes careful selection and long-term planning essential.
If you’re exploring life settlements as part of your strategy, consider speaking with an experienced team like i2 Advisors. We can help you evaluate opportunities, understand the risks and build a portfolio that aligns with your long-term goals.