Every investment in your portfolio should serve a purpose. A money market fund provides liquidity, dividend stocks generate income, and bonds help cushion losses when stocks decline.
So what role does a life settlement play? Life settlements are suited for long-term goals, such as building wealth or leaving a legacy. They are not ideal if you need cash soon or want steady income. Let’s take a closer look.
How Do Life Settlements Pay Out?
A life settlement pays out in one lump sum when the policy matures, which happens when the insured person passes away. That payout structure shapes the role a life settlement can play in your portfolio.
AI tools that analyze more health and lifestyle data may help sharpen these estimates over time, though no estimate can guarantee a date. While no one can predict the exact timing of a policy’s maturity, independent medical underwriting firms develop life expectancy (LE) estimates using comprehensive medical records, actuarial data, mortality statistics, and established underwriting methodologies. These estimates provide a statistically informed assessment of an insured’s projected longevity. However, actual mortality may occur earlier or later than the estimated life expectancy.
Until the policy matures, you pay the premiums that keep it in force, and you generally won’t receive payments along the way. Some whole life policies pay dividends, which aren’t guaranteed but can often be applied toward premiums.
What Life Settlements Can Do for Your Portfolio
Beyond the potential returns, a life settlement can offer several portfolio benefits.
- A steady holding: The death benefit is fixed when you buy the policy, so market swings don’t affect your policy’s face value.
- Strong long-term return potential: The internal rates of return (IRR) on life settlements typically run 11% to 13% when a policy matures near its estimated date. Policies that mature later return less, while those that mature sooner can return more.
- A clear long-term role: A life settlement may be a good home for money you won’t need until the policy matures. Your other holdings can cover near-term needs and regular income in the meantime.
- The chance for outsized returns: Returns of 400% or more are possible if a policy matures far earlier than expected. They can even reach 800% or more when a policy bought at a steep discount matures within its first year or so.
- More balanced payout timing: When you invest in several policies with different insureds and maturity estimates, your returns don’t depend on a single payout.
Other Benefits of Life Settlements
Life settlements can also support goals that go past your own returns:
- Wealth that builds over time: You typically buy a policy for 20% to 30% of its face value and collect the full amount when it matures. Your profit is the difference between the policy’s death benefit and your purchase price, minus the premiums and any fees you pay along the way.
- A legacy for your family: If you die before the policy matures, it passes to your successor owner or your estate, and they collect the full death benefit at maturity. Naming a successor owner or placing holding policies in a trust can help your family avoid probate delays.
- A hands-off process: Sourcing, evaluating, and maintaining policies on your own takes time and expertise. i2 Advisors makes life settlements an easy, hands-off addition to your portfolio. Through a turnkey process, i2 handles policy sourcing and purchase paperwork, tracks each policy, and serves as a backup contact for grace notices so a missed premium doesn’t cause a lapse. You fund the purchase and the premiums, and you own each policy directly.
What Life Settlements Can’t Do for Your Portfolio
Because a life settlement pays only at maturity, it has some limits as a portfolio holding. A life settlement can’t:
- Provide quick cash: Your invested money and the death benefit remain tied up until the policy matures. The secondary market to resell a policy is limited, so selling may take time and often means accepting a lower price. Unlike stocks, there is no public exchange to easily sell life settlements.
- Pay regular income: A single policy pays only at maturity, so it can’t replace a monthly income source. Owning several policies with different maturity estimates may create more frequent payouts, but timing remains uncertain.
- Promise a payout date: Life expectancy (LE) estimates are developed using comprehensive medical evaluations, actuarial data, and established underwriting methodologies. While these estimates provide a statistically informed assessment of projected longevity, they do not guarantee when a policy will mature. Actual mortality may occur earlier or later than projected, making the timing of a policy’s maturity inherently uncertain.
- Remove insurer risk: The payout relies on the insurance company’s ability to pay, so carrier financial strength ratings matter when you select a policy.
- Guarantee a profit: If the insured outlives the life expectancy estimate, extra premium payments may reduce your return or cause a loss.
How Timing Affects Life Settlement Returns
Let’s look at a hypothetical example that shows how much the payout date can change your return on the same policy.
Say you pay $40,000 for a universal life policy with a $150,000 death benefit and a 10-year LE, with premiums that run $1,500 a year.
If the policy matures right at the 10-year mark, you’ve spent $55,000 between the purchase price and premiums. You then collect $150,000, for an IRR of about 11.7%.
Here’s how the numbers can change when the policy matures earlier or later than expected:
Policy matures in |
Total costs |
Profit as a percentage of total costs |
IRR |
|---|---|---|---|
| Year 1 | $41,500 | 261% | 261.4% |
| Year 3 | $44,500 | 237% | 51.5% |
| Year 5 | $47,500 | 216% | 27.3% |
| Year 10 | $55,000 | 173% | 11.7% |
| Year 15 | $62,500 | 140% | 7.0% |
| Year 20 | $70,000 | 114% | 4.7% |
Figures include premiums but not servicing or other fees, which vary by provider.
A policy that matures in year three yields an internal rate of return of about 51.5%. If the insured lives to year 15, five extra years of premiums increase your cost to $62,500 and lower the return to about 7%.
Do Life Settlements Fit Your Portfolio Goals?
Life settlements can fit your portfolio if you won’t need the money for many years and you’re comfortable with an uncertain payout date. These questions can help you decide:
- Are you an accredited investor? Many life settlement offerings are open only to accredited investors—generally those with a net worth over $1 million (not including a primary home) or income over $200,000 ($300,000 with a spouse or partner) in each of the last two years.
- Can you leave this money untouched until the policy matures, even if that takes 15 years or more?
- Do you have separate emergency savings and income sources to cover your needs while your money is tied up in a policy?
- Can you keep paying premiums if the insured lives longer than estimated? A policy typically pays out only if it’s still in force when the insured passes away.
- Are you comfortable not knowing exactly when the payout will arrive?
If you answered yes to most of these, i2 Advisors can help you choose a policy size and decide how many policies to spread your money across.
Life Settlements: A Strong Fit for Patient Money
A life settlement works best with money you can leave invested for years. It can add long-term growth potential and help build a legacy, but it won’t replace your emergency fund or provide monthly income.
If you’re ready to see how life settlements could fit your goals, contact i2 Advisors to review available policies.