One of the many benefits of life settlement investing is that it delivers annualized returns of 11% to 13%. However, this data masks the large dispersion between top and bottom-quartile funds. Your actual returns can be much higher or lower, depending on your life settlement fund manager’s skill level.
Let’s take a look at why the life settlement manager selection is critical and how you can choose the right one for your life settlement portfolio management.
WHY THE MANAGER MATTERS MORE IN LIFE SETTLEMENTS THAN IN TRADITIONAL ALTERNATIVES
The life settlement asset class doesn’t have a standardized marketplace or index to follow, so returns largely depend on your manager’s ability to source policies and quality third-party providers like life expectancy underwriters, evaluate data and the policy’s worth and set a research-based purchase offer.
Other ongoing costs, such as premium payments, servicing fees and administrative expenses, also vary by manager and can significantly affect returns. Even if two managers buy the same policy, differences in how they optimize these costs can lead to noticeably different internal rates of return.
WHAT TOP-QUARTILE LIFE SETTLEMENT MANAGERS DO DIFFERENTLY
More experienced and skilled managers can fetch better returns. Below are the details on what makes a top-performing life settlement fund.
1. Superior Life Settlement Sourcing and Deal Flow
Top life settlement managers usually have access to a greater variety of fairly-priced policies that may deliver better returns. They work with trusted advisors but also build direct relationships with insurance agents, financial advisors, estate planners and even policy owners.
As a result, these managers may get early access to policies available for sale. This helps avoid situations where too many buyers bid on the same policy, pushing the policy price higher and diminishing returns.
2. Disciplined Underwriting and More Accurate LE Modeling
Stronger managers aren’t relying on any one life-expectancy estimate to make final decisions. The best managers work with multiple life expectancy (LE) providers, compare assumptions and conduct their own analysis to get a clear picture of a policy’s true risk.
This process helps managers avoid issues that inexperienced managers fall into,such as “LE drift,” in which overly optimistic estimates lead to overpaying for policies and lower returns.
3. Smarter Pricing and Deal Selection
You’ll also notice that top-performing managers are selective about which policies they recommend to investors. Instead of chasing competitive bids, they stick to clear criteria for age, health, premiums and policy type and understand the unique risks tied to each carrier.
Moreover, they aren’t afraid to advise against a purchase if the numbers don’tmeet their underwriting targets, even when investors are ready to put their money to use.
4. Portfolio Construction Strategy
Experienced managers don’t rely on any one policy to drive returns. Instead,
they help investors build balanced portfolios that diversify risk across:
- Ages and health conditions
- Insurance carriers
- Policy sizes
- Premium schedules
They also avoid concentration risk and ensure there’s sufficient liquidity to cover ongoing premiums. This broader mix helps smooth out performance and reduces the impact of any single policy underperforming.
5. Active Policy Servicing and Premium Optimization
What happens after you buy a policy is just as important as the upfront work that goes into the initial purchase. High-performing policies have managers who keep LE estimates up to date, work to structure premium payments more efficiently and ensure policies don’t lapse unintentionally.
6. Operational Infrastructure and Compliance
There’s a lot that needs to run smoothly for a life settlement to stay on track, including:
- Reliable systems for tracking premiums
- Consistent processes for monitoring changes to the insured’s health
- Experienced servicing teams that keep up with paperwork, deadlines and policy updates
Good oversight and straightforward reporting help investors see what’s happening in the portfolio and catch issues early.
7. Transparency and Reporting
Transparent reporting can make a world of difference in how confident you feel about a life settlement investment. Strong managers provide peace of mind by:
- Laying out realistic return projections
- Showing how different groups of policies are performing
- Explaining assumptions behind longevity estimates
Low-tier managers provide far less detail, leaving investors with doubts and questions about their investment.
9 WARNING SIGNS OF UNDERPERFORMING MANAGERS
Avoiding underperforming managers is easier when you know the red flags to watch out for. Below is how to evaluate life settlement fund managers for warning signs. Notice if they:
- Use overly optimistic life-expectancy estimates
- Bid too aggressively and drive prices up
- Have a thin policy pipeline that leads to “forced” purchases
- Have limited experience with managing or reducing premium costs
- Have no internal life settlement underwriting expertise
- Provide little transparency around how policies are serviced
- Give no clear explanation of how they help mitigate longevity risk
- Not involved in policy selection or the underwriting process
- Unable to explain how premium optimization works
HOW INVESTORS CAN IDENTIFY TOP-QUARTILE LIFE SETTLEMENT FUNDS
Just as red flags can help you spot weaker managers, the right questions can help you find the more experienced ones. You’ll want to do your life settlement due diligence by asking managers questions like:
- What’s your mix of brokered vs. directly sourced policies?
- What’s your buy box for age, health and premiums?
- Which life-expectancy providers do you use, and how do you compare their estimates?
- How do your actual returns compare with your projections?
- How often do you update life-expectancy estimates?
- How many of your policies have optimized premiums?
- How far off have your longevity estimates been historically?
- How diversified is your portfolio?
- What’s the worst-case scenario you’ve experienced, and how did you handle it?
- How do you avoid overpaying when multiple buyers are bidding?
- What systems do you have for servicing and tracking policies?
The answers to these questions can reveal the manager’s true skill level and whether they’re the right ally for your life settlement portfolio management.
IN LIFE SETTLEMENTS, MANAGER SELECTION IS PERFORMANCE
Life settlements can be an attractive alternative investment, but your returns depend heavily on the life settlement fund strategy. In some cases, your internal rate of return (IRR) can be 1,000% or more when policies mature earlier than expected.
The difference between a fund that delivers average annualized returns of 11% to 13% and one that ranks in the top quartile may come down to disciplined underwriting, careful pricing and premium optimizations.
If you’re exploring life settlements, reach out to an i2 advisor today to learn more about what drives top-tier life settlement fund performance in this asset class.