As many investors seek better and less risky investments, there is one opportunity stands apart from the rest.

One of the few asset classes that can really provide this is the asset class known as life settlements.

With an established regulatory and legal framework developed around this asset class, life settlements can provide investors with both yield and liquidity uncorrelated to traditional capital and commodity markets.

Life settlements have been around for years – but it’s still a growing industry. There as on most people haven’t heard about the mis because 95% of the industry is owned by major institutions such as hedge funds, institutional investors, and insurance companies.

Over the last 20 years well-respected institutional investors such as Deutsche Bank, Credit Suisse, Goldman Sachs Berkshire Hathaway, AIG, Apollo, and Fortress have collectively invested billions of dollars into this little-known asset class seeking returns of 12%-20%.

American Seniors Are Losing Billions Every Year!

Each year, some $200 billion in life insurance will lapse or be surrendered that could have been sold on the secondary market instead.

Roughly 10,000 people in the U.S. reach their 65th birthday every day, according to the United States Census Bureau statistics 2023 — a demographic trend known as the “silver wave.” By 2050, the number of seniors in the U.S. is projected to exceed 88 million and account for more than 20% of the population.

Unfortunately, that ballooning older population is facing extreme financial headwinds. Study after study has documented insufficient retirement funding for many of these older savers.

Given these trends, seniors should be capitalizing on every penny of value tied up in their assets, including life insurance. However, many seniors and people in general don’t realize their life insurance policy is an asset that can help with retirement.

Yet many people don’t even realize this option exists!

“A lot of people with life insurance don’t value it as an asset, they think of it as a lease.”

For many, the perceived value of life insurance is the death benefit which can act as a financial safety net for loved ones in the case of accidental death. However, almost 90% of all life insurance policies will be lapsed or surrendered without paying the death benefit, which means money is being left on the table.

An insurance lapse returns nothing to the policyholder. And a life insurance surrender returns only a minimum amount of cash relative to premiums invested. Seniors can usually generate far more funding by selling those unwanted policies on the secondary market in a life settlement.

Life settlements can command sales prices that are 4-11 times higher than the policy’s surrender value, or up to 60% of the death benefit.

A life settlement can be a way to get cash for life insurance policy owners no longer need or can no longer afford. For older adults who are struggling to pay for health care costs or long-term care in retirement, it can be a much-needed lifeline.

A 2022 survey by the Insurance Studies Institute found that 90% of seniors who have let a policy lapse would have considered selling it if they had known about life settlements. That is to say, most people don’t know their life insurance policy has a secondary market value and can be sold, in some cases for a value greater than their house.

These policyholders are at a higher risk for lapsing or surrendering their policies for less than they’re worth because they don’t know that policies are a sellable asset.

Awareness among personal finance professionals is higher, but acceptance among financial advisors and broker-dealers is lower than it should be. Many advisors and brokers don’t fully understand life settlements and are resistant to learn.

A Life Settlements are based on the premise that many individuals no longer need or can afford to keep paying premiums on their insurance policies.

A life settlement is the sale of an in-force life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement transaction, the policy’s owner transfers ownership of the policy to the buyer in exchange for an immediate cash payment. The buyer of the policy pays all future premium payments and receives the death benefit upon the death of the insured. In addition to age, expected life expectancy, and policy characteristics – including premium costs – other factors determine the final amount disbursed to the policyholder. For many, life insurance settlements can convert an unneeded policy into an asset with substantial value.

Life Settlements became more sophisticated as actuarial techniques and advanced financial analysis were implemented during the underwriting process. With the senior population adhering itself to traditional underwriting guidelines, the Life Settlement industry could then leverage the existing foundation of the life insurance industry and with a supply of life insurance policies that has grown exponentially into a multi-billion dollar market.

Let’s look at one example of how a life settlement works.

Charls is eighty-five and owns a $5 million insurance policy and pays $200,000 each year in premiums. He has outlived the usefulness of the policy, so he has three options to consider:

1. He can withdraw any cash value and then cancel the policy.
2. He can hold onto the policy and allow any cash value to pay premiums before canceling the policy.
3. He can sell it.

He decides the best option is to sell the policy, which allows him to receive three to four times the cash value of the policy itself.

The History of Life Settlements

Life settlements aren’t new. They’ve been around in one form or another since 1911, when the U.S. Supreme Court established that life insurance policies is considered a private property just like a house, car, boat etc. – and can be sold at the will  of the owner.

As an investor, we might be wondering how this practice is legal. In 1911, the Supreme Court ruled in a case, Grigsby vs. Russell, which determined that because a life insurance policy is their personal property, they are able to sell it.

The case made its way to the Supreme Court in 1911 after a doctor named A.H.Grigsby treated a patient named John C. Burchard – and Burchard offered to sell the physician his life insurance policy for $100 – as long as Dr. Grigsby agreed to pay the remaining premiums.

When Burchard died a year later, Dr. Grigsby attempted to collect the benefits from the life insurance policy he’d purchased a year earlier. Unfortunately, the executor of Burchard’s estate didn’t want to turn over the lump sum payment. The executor took it to court and won.

Justice Oliver Wendell Holmes and the United States Supreme Court eventually took the case and ruled in favor of Dr. Grigsby.

Here’s what Holmes said while delivering the court’s opinion:

“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

Just like that, life settlements became a viable alternative investment opportunity– and one in which Americans could sell their premiums for much-needed cash.

While the Supreme Court’s ruling on Grigsby vs. Russell opened the door for people to sell and purchase life insurance policies, it wasn’t until later that the “life settlement industry” emerged.

The industry officially began in the early 1990s when life settlements were referred to as viaticals.  At the time, millions of people were becoming infected with AIDS, which meant that there were many victims and families devastated by this prognosis.

Since those that were diagnosed with AIDS were typically younger, this meant they didn’t own much as far as an estate, but they did own smaller life insurance policies. Life expectancies were around two years and people with the disease required additional finances to live out the rest of their lives as comfortably as possible. And so, the industry began with many selling life insurance policies at the time.

These types of deals continued for decades, but as medical technology advanced, so did life expectancy. Viatical settlements became less common, but another group of individuals in need of money emerged: senior citizens.

In the late 1990s, a new but similar asset class emerged, called life settlements. The main differences here include:

• Increased age of the insured
• Larger death benefits
• Life expectancy is easier to predict due to the insured person’s advanced age.

Does Investing in Life Settlements Make Sense?

A life insurance policy is a life-long commitment – one that lasts through the good, the bad, and sometimes longer than necessary.

Don’t get the wrong idea, life insurance makes sense for those insured. Especially when you’re younger, have a family, caring for a loved one with life-long special needs or want to ensure that your family is financially cared for in the event of a death.

However, after the kids have gone out on their own or incomes become fixed – the policy becomes a burden. Unfortunately, that monthly premium still needs to be paid. Sure, some people let the policy lapse, but they walk away with nothing except the nagging feeling they’ve wasted thousands of dollars on monthly payments.

There are a couple types of investors that can purchase a life insurance policy. One is institutional investors, the other is mid-to-high net worth accredited investors.

By selling a life insurance policy, the insured can discreetly liquidate an asset and receive more than the cash value in the policy. The investors ultimately receive a sizeable return on their investment.

Life Settlements as a Growth Strategy

Life settlements contribute to retirement funds or legacy wealth. Investors should not approach this investment as an income or a liquid short-term investment. There is a known payout on purchased policies, which eliminates the uncertainty that many investments possess.

Going back to the example with Charles, his policy was purchased for $3,000,000 and the death benefit was $5,000,000, creating a $2,000,000 profit for investors.

You can expect an investment range from $50,000 to $5,000,000 depending on the structure. To ensure success with life settlements, it is essential to work with established companies that have a track record of helping clients as well as a high level of transparency.

Myths About Life Settlement Investments

You might still be skeptical at this point, especially if you’ve heard any of the following myths about life settlements. Find out the truth about each.

For both the insured and the investor, it’s crucial to fully understand the action you’re taking before making a decision about life settlements.

What You Might Not Know About Life Settlement Investments

Pros & Cons of Life Settlement Investments

Why Investors Love Life Settlements

let’s explore a few reasons they are an ideal investment.

• They are unaffected by the ups and downs of the stock market. 
• Politics, military actions, global economics, and natural disasters do not affect them.
• Life settlements do not require active management or ongoing management fees because they are a one-time investment. Once an asset has been purchased, the only risk variable is time.
• You don’t pay taxes until the policy is due.
• Life settlements return consistent rates, from the high single-digits to the low double-digits.

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