Life Settlements
Benjamin Franklin Said ‘in this world there is nothing certain but death and taxes.”
Because death is certain and has no correlation to the stock market, today represents an excellent time to take another look at life insurance settlements.
Life settlements are not new to the hedge fund world as many managers identified the investment vehicle early on as a solid and steady alternative to market fluctuations. Others have stayed on the sidelines because they believe the industry needed maturation and greater market acceptance.
As financial conventions fall by the wayside in this tumultuous year, the life settlement industry looks more attractive than ever.
As a quick primer, life settlement companies buy insurance policies at a heavy discount from seniors who either can no longer afford or no longer wish to own permanent life insurance. The life settlement pays more than the cash surrender value to the seller, and the investor holds the policy until maturation, earning the full death benefit. Creating a diversified portfolio of policies from a number of sellers spreads the risk, and such portfolios have proven to offer a yield of 8-11 percent and in some cases more per year. By some estimates, the industry might soon be buying over $10 billion worth of life insurance per year.
The underlying reasons to invest in life settlements haven’t changed. The industry’s growth and evolution are key reasons why it deserves a second look.
Here are the five main reasons that investors should consider investing in life settlements.
- Non-correlated assets that can generate an attractive yield.
The markets have little effect on life settlement yields. One of the key aspects of a life settlement is that the investor earns a payout on the demise of the policyholder. The strength or weakness of the stock market does not impact the life settlement arena. Diversified portfolios have been performing well. - Life settlement assets are backed by highly rated financial institutions.
Life settlements are performed on policies held by carriers with A.M. Best ratings of B++ or better, so the payouts are regulated and solid. It is important to note that the life insurance industry remains healthy despite the problems at carriers like AIG, where the main business lines were solid. - Trading platforms exist.
Several “household name” institutions have developed or are developing platforms to trade life settlement policies and portfolios. Smaller markets also exist, so this is no longer a strictly “buy and hold” investment. - Securitization is on the horizon.
Though it may not be this year, securitization is definitely in the future for life settlements. Portfolio analysis comprising the past several years proves that life settlement portfolios will perform predictably and generate consistent cash flow. It remains an attractive candidate for securitization. - Third party tracking, servicing and underwriting simplify the investment.
In a sign of a maturing industry, life settlements are not necessarily managed by one-stop shops anymore. The size and scope has made it profitable for third party companies to manage tracking, servicing, and some underwriting, thus easing entry by financial players.
For investors looking for non-correlated opportunities during these trying times, life settlements might be the answer.
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