On September 16, the Federal Reserve raised its benchmark interest rate by a quarter point to a range of 3.75% to 4%. This unanimous decision marked the first increase since 2023. The Fed cited elevated inflation and stated that the move supports a faster return to its 2% inflation target.
Many investors view rate increases as negative for their portfolios because higher rates often lower both stock and bond prices. However, life settlements react differently to rate changes, and some effects may even benefit buyers.
Let’s take a closer look at why life settlements respond differently, how higher rates affect the life settlement market and what these changes mean for current and future life settlement investors.
Correlated and Non-Correlated Assets: Why the Difference Matters
Correlated assets are investments that tend to move in lockstep with changing economic conditions, such as interest rate shifts. Bonds, stocks and real estate are common examples. Here is how each can react when rates rise.
- Bonds with older, lower rates lose value because buyers can obtain higher yields from new bonds.
- Stocks may decline as companies face higher borrowing costs and future earnings become less valuable in present terms.
- Real estate values often fall when higher mortgage rates increase monthly payments, reducing what buyers can afford. As a result, sellers may need to lower prices.
When most assets in a portfolio react to the same event, portfolio diversification becomes less effective during those times.
Non-Correlated Assets
A non-correlated asset such as a life settlement typically moves independently. Its payout depends on the insured person’s life expectancy, which doesn’t directly relate to Fed decisions or stock market changes.
Instead, returns depend primarily on when the policy matures. Annual returns (internal rate of return, or IRR) often range from 11% to 13%. If a policy matures much earlier than projected, returns can be significantly higher. Conversely, if the insured lives longer than expected, you pay premiums longer, reducing returns.
Receiving the death benefit also requires the insurer to remain solvent and the policy to stay active through timely premium payments.
How Higher Rates Can Affect Life Settlements Indirectly
A federal interest rate increase doesn’t alter the life insurance policy’s death benefit, but it can still affect the life settlement market where policies are bought and sold. As a result, higher rates impact life settlement investors in several ways:
- Purchase prices can go down. When traditional investments pay more, buyers seek higher returns from life settlements, so many make lower bids to policyholders.
- Resale values can dip if you sell a life settlement investment early, as new buyers also seek higher returns. However, resale value only matters if you sell the policy. Life settlements are intended to be long-term investments, so resale value matters less for most investors.
- Institutional buyers frequently use borrowed funds to purchase policies. When borrowing costs increase, they may buy fewer policies, reducing competition and potentially lowering prices.
- Investors have more alternatives when bonds and savings accounts offer higher yields, which can divert funds away from life settlements. This shift in supply and demand can further reduce prices.
Do Rate Cuts Raise Life Settlement Prices?
Rate cuts often have the opposite effect. When the Fed lowers rates, traditional investments yield less, making buyers willing to accept smaller returns from life settlements and pay more for new policies. This can increase the resale value of policies you already own, while new investors may pay higher prices for the same death benefit.
Remember that regardless of rate changes and economic cycles, a policy’s face value remains constant.
What the Rate Increase Means for Policies You Already Own
If you already own a life settlement, the Fed’s decision doesn’t affect your payout. The death benefit is fixed in the contract, and the payout date depends solely on the insured’s lifespan. As long as you keep paying premiums and hold the policy to maturity, rate increases or stock market changes won’t affect your payout.
What the Rate Increase Means for New Investors
If you are considering buying a life settlement, higher rates may benefit you. Lower policy prices mean you pay less for the same death benefit, which can increase your return.
Because you have to pay premiums until the policy matures, setting aside a reserve to cover them can keep the policy active if the insured lives longer than expected. Spreading your investment across several policies can also help diversify your portfolio, because one policy that runs long has less effect on your overall return.
Life Settlements and Higher Rates: A Steady Part of Your Portfolio
Interest rate increases can push down the value of stocks, bonds and real estate at the same time, but they don’t affect a life settlement’s death benefit. Your life settlement returns depend primarily on the insured person’s lifespan. Higher interest rates may lower purchase prices for new policies, but they won’t affect a policy’s face value.
To explore how life settlements can fit into your portfolio, contact i2 Advisors to discuss your options. At i2 Advisors, you purchase policies directly while we manage the entire process.
Before you buy, you’ll receive a detailed report on each policy that shows the insurer’s AM Best rating (a measure of its financial strength) and the insured’s current medical conditions and life expectancy estimate. It also lays out the monthly cash flow with all premiums and fees, plus the projected return relative to life expectancy.
After your purchase, we also act as a secondary addressee on policy notices, helping prevent lapses due to missed communications.