For years, if you wanted to diversify, you simply bought a variety of stocks and threw in some bonds for good measure. But things today aren’t so simple. With inflation persisting, interest rates fluctuating and global events keeping everyone on edge, investors are reevaluating their approach. More and more, people are looking to alternative investments for steady income and peace of mind.
Life settlements are gaining popularity as the go-to, non-correlated alternative asset due to their predictability and actuarially-driven returns. But do life settlements truly earn their place as a portfolio diversifier — and how might they fit into your broader investment strategy? Let’s explore.
WHY LIFE SETTLEMENTS ARE GAININGATTENTION NOW
In uncertain markets, some alternative investments may offer greater portfolio stability than stocks and bonds. As a result, they represent a growing share of portfolios for high-net-worth (HNW) and institutional investors.
Yet, traditional alternatives — real estate, private equity, private credit — still expose investors to familiar risks: credit cycles, valuation resets and liquidity shocks. So, if alternative assets are gaining momentum, it’s not these investments that are driving the surge. Instead, the real driver is life settlements because they offer stability where other assets don’t.
Key Reasons Investors Are Excited About Life Settlements
A survey found that the top three reasons investors were turning to life settlements were to:
- 1. Diversify their portfolios
- 2. Have a better risk-return profile
- 3. Take advantage of life settlements’ low correlation to other asset classes
Notably, the survey also shows that over 40% of investors plan to increase their investments in life settlements within the next year.
Many investors view them as a smart move amid persistent market volatility, as they offer predictable, steady returns ranging from 11% to 13% annually. However, returns of 800% or higher are possible when a policy matures earlier than expected.
LIFE SETTLEMENTS AS ALTERNATIVE INVESTMENTS: HOW THEY WORK
The life settlement process is generally straightforward and usually a win for all parties involved. Many seniors want to sell their life insurance policy because they no longer need it, or premiums are too high now that they’re on a fixed retirement income.
Instead of letting those policies lapse or cashing them in for pennies on the dollar, many seniors sell them to investors as a life settlement. They walk away with a lump sum — sometimes up to seven times what they’d get by surrendering the policy — and can use that money however they like, whether it’s for healthcare, travel or leaving a legacy.
Your Role as the Investor
As the investor, you step in and take over the policy, paying any remaining premiums and ongoing policy fees. When the time comes and the insured passes away, you collect the death benefit as a lump sum.
In this way, life settlements can provide bond-like stability with equity-like returns. You won’t see the policy’s face value rise and fall with the market, and if you have several life settlements for portfolio diversification, you might enjoy a stable income stream as policies mature at a measured pace.
LIFE SETTLEMENTS VS. POPULAR ALTERNATIVES: HOW DO THEY COMPARE?
The tables that follow look at the returns, market correlations, risk factors andmore of various alternative asset classes to help you understand why life settlements are distinct.
Life Settlements
| Return Driver | Longevity and mortality outcomes of insured individuals |
| Market Correlation | Very low; Driven by actuarial data, not market cycles |
| Liquidity | Low (5+ years); Limited resale market |
| Typical Investors | Family offices, RIAs and institutional investors seeking true non-correlation |
| Risk Factors | Longevity variance, premium payment obligations, regulatory oversight |
| Performance Profile | Counter-cyclical; Stable when equities, credit or real estate decline |
Private Equity
| Return Driver | Company growth, operational improvements and profitable exits (IPOs or acquisitions) |
| Market Correlation | High; Performance tied to business cycles and market valuations |
| Liquidity | Very low; Capital typically locked for 7-10 years |
| Typical Investors | Institutions, pension funds, ultra-high-net-worth investors |
| Risk Factors | Valuation compression, recession risk, limited exit opportunities |
| Performance Profile | Excels during expansions; cyclical and sensitive to market sentiment |
Real Estate
| Return Driver | Rental income, appreciation and cap-rate compression |
| Market Correlation | Moderate; Influenced by interest rates and local market dynamics |
| Liquidity | Moderate; Can sell or refinance but often illiquid in downturns |
| Typical Investors | HNW individuals, REITs, institutional real estate funds |
| Risk Factors | Rate sensitivity, property devaluation, maintenance and financing costs |
| Performance Profile | Stable in balanced markets; pressured by high rates or weak demand |
Private Credit
| Return Driver | Interest income and principal repayment from direct lending |
| Market Correlation | Moderate-to-high; Exposed to credit and default cycles |
| Liquidity | Low-to-moderate; Depending on fund structure |
| Typical Investors | Yield-oriented institutions and private credit funds |
| Risk Factors | Borrower defaults, tightening liquidity, rate volatility |
| Performance Profile | Performs best in stable credit environments; stress-sensitive in downturns |
WHERE LIFE SETTLEMENTS FIT IN A MODERN PORTFOLIO
Life settlements may help stabilize portfolios and protect your capital during market swings. Here’s how:
- Diversification impact: Diversifying portfolios with life settlements adds assets that are not correlated with the market, helping to smooth out returns and reduce significant losses.
- Optimal allocation: Adding 5% to 10% in life settlements to your portfolio can lower volatility while maintaining overall performance.
- Historical resilience: During 2022’s market downturn, equities and bonds lost ground, but life settlement funds held steady.
- Performance consistency: Life settlements typically deliver returns gradually, regardless of changes in interest rates or equity performance.
WHAT TO KNOW BEFORE YOU INVEST
Investing in life settlements takes patience and a long-term view. You can buyindividual policies directly, but you’ll need to do your due diligence in checking numerous factors about the policy and the insured to ensure you understand the risks and potential of that policy.
Alternatively, working with an experienced life settlement advisory company can cut the learning curve and provide a clear path forward. You also won’t have to manage every investment detail on your own, as the company can manage the policy and its ongoing obligations on your behalf.
Risks of Life Settlement Investments
As with any investment, life settlements also come with their own set of risks, such as:
- The insured living longer than estimated
- Needing to keep the policy in force until maturity to receive any funds
- Limited protection in cases where insurers go bankrupt
Having a well-diversified portfolio of life settlement policies can help mitigate some of these risks.
BUILDING RESILIENCE THROUGH TRUE DIVERSIFICATION
True portfolio diversification today is more about reducing correlation than adding different asset classes to your portfolio. Life settlements as alternative investments offer steady, actuarially driven returns that remain resilient during economic downturns and periods of uncertainty.
Once considered a niche market, life settlements have evolved into a mainstream investment strategy, thanks to market regulation and technological advancements in life expectancy estimates.
How could life settlements fit into your bigger investment plan? Contact an advisor today to explore life settlement investment opportunities.