What is a Life Settlements investment?
Tony Bremness, Laureola Advisors
The sale in the USA of a life insurance policy to a 3rd party
Imagine having the ability to benefit from the diligent financial habits of middle America.
Like most residents of advanced countries, Americans have a tradition of establishing a life insurance policy as they start a family, take on a mortgage or build their own business. Over a period of responsible financial discipline, the children become independent, and debt is paid off. The need for insurance cover diminished.
Some policyholders realise that their life policy is a financial asset and would seek to cash in its value. Unfortunately, there is a low level of understanding of the options available to cash in life insurance policies. This resulted in over 90% of life policies being terminated in the US without paying a death benefit in 2018.
To provide a better outcome, the life settlements market was formed to match policyholders wishing to sell their unwanted cover to investors looking for a non-correlated asset class with the potential for stable returns. A life settlement market will give policyholders additional options in obtaining a higher value of their policies.
A life settlement transaction starts with a policyholder selling their life insurance policies to an investor (usually a fund). The life settlement investor buys the life insurance policy from the policyholder and commits to paying future insurance premiums until the insured person dies. The investor then collects the death benefit payout from the insurance company as the concluding repayment of the life settlement transaction. The path of an illustrative policy is shown below.
Illustrative example - assume a life settlement transaction backed by a policy with a death benefit of $100k
Hence, a life settlement transaction is clearly win-win transaction for the seller and for the investor. The returns to the investor are embedded in the benefit payout collected upon the maturity of the policy. Most market observers estimate a long-term range of 6-12% p.a. as potential returns going forward as long as the portfolio is managed properly.
Funds operated by this manager: