Seasoned investors know that in real estate, the property matters as much as the price. The same principle applies to life settlements; the policy you purchase determines your premium costs, your timeline, and ultimately your return.
But not every life insurance policy is a strong investment. Most life settlements involve permanent policies, with universal life and whole life being the most common. The policy size matters too, since a face value that is too large or too small can affect your returns at maturity.
Let’s take a closer look at which policy types make the best life settlements and what policy size best fits your portfolio.
Why Permanent Policies Dominate Life Settlements
Life insurance policies fall into two broad categories: permanent and term. Permanent policies, such as universal life and whole life, cover the insured for their entire lifetime and often build cash value over time. Term policies provide coverage for a set period, usually 10, 20, or 30 years. If the insured outlives the term, the coverage expires with no payout.
Because term policies carry a higher risk that an investor will receive nothing for their investment, they are generally ineligible for a life settlement unless they can be converted to permanent coverage (details further below). As a result, most policies sold as life settlements are permanent.
Here’s how the two main types of permanent policies, universal and whole life, compare for investors.
Universal Life
Universal life policies dominate the life settlement market, accounting for roughly 95% of policies sold, largely due to their flexible premiums.[1] A universal life policy stays in force as long as there’s enough value in the policy’s account to cover the monthly insurance cost.
Experienced life settlement managers often take advantage of premium flexibility by paying only the minimum needed to keep the policy active. Keeping premium costs low can help investors achieve the 11% to 13% annual returns that life settlements typically generate.
Some universal life policies, known as survivorship policies, cover two people—usually spouses—and pay the death benefit after the second insured passes. These are also common in the life settlement market.
Whole Life
Unlike universal life policies, whole life premiums are fixed. Fixed premiums can make budgeting easier since investors know their carrying costs upfront.
Whole life policies also build a guaranteed cash value, and the death benefit is practically assured as long as the policy remains active and the insurer remains solvent at maturity. This is one of the reasons it’s wise to review the carrier’s financial strength ratings as part of your due diligence when researching policies.
Where Convertible Term Policies Fit In
Some term policies have a conversion rider that allows the policyholder to switch their term coverage for a permanent policy without new medical underwriting. Once converted, the policy offers the lifelong coverage investors prefer and can be sold like any other permanent policy.
Most insurers require policyholders to convert before a certain age, such as 65 or 70, or within a set number of years after purchase. A policy would need to offer the option to convert to be eligible for a life settlement.
Rarely, a term policy may sell without conversion, usually when the insured’s life expectancy falls within the remaining term. These cases are exceptions and are more common in viatical settlements.
How Much Should You Invest in a Single Policy?
Many investors allocate 5% to 10% of their portfolios to life settlements. As a rule of thumb, limit any single policy to a small portion of your life settlement allocation, and invest only what allows you to reserve enough for ongoing costs such as premiums and administrative expenses.
For example, investors typically pay 20% to 30% of a policy’s face value upfront, plus ongoing premiums and other holding costs, such as servicing fees and administrative expenses, to keep the policy active.
If you invest everything in a single policy, you might find yourself without enough flexibility to adjust or diversify later on. Instead, many investors prefer to buy several smaller policies or shares in multiple policies. This can help spread out their risk if a life expectancy estimate doesn’t match reality.
What Size Policy Is Best for Your Portfolio?
The ideal policy size for you depends on your investment goals, diversification strategy, and the amount of capital you can commit while reserving enough for future premiums. Here’s more on what you need to know to help you understand what policy face value works best for you.
Minimum Face Value
To qualify for a life settlement, a policy generally needs a face value of at least $100,000. Smaller policies are usually not worth the underwriting and servicing costs, so investors tend to avoid them.
The Most Common Policy Sizes
Most buyers look for policies with face values between $500,000 and $5 million. In 2023, investors purchased about 3,218 policies with a combined face value of $4.67 billion, averaging roughly $1.45 million per policy.[2]
Larger policies can be worthwhile, but keep in mind they may be less attractive to investors if you ever resell. They can also be expensive to maintain, with large premium payments riding on a single insured.
Building Your Portfolio Around the Right Policies
The best life settlement investments start with the right policy. Permanent policies, especially universal and whole life, generally offer the most dependable path to returns. Convertible term policies can be an option when the conversion window is still open.
After finding the right policy type, look for face values large enough to provide your desired return on investment, but small enough that you have sufficient capital to maintain a diversified portfolio.
Of course, you’ll still want to go through the process of doing your due diligence to make sure the insured’s profile and the insurance company are also a match for your portfolio. Experienced life settlement advisors, such as i2 Advisors, can help you analyze your policies and provide a turnkey approach.
Ready to build your portfolio with your best policies? Contact i2 Advisors today to explore available options.