If you are looking for an investment option beyond the usual stocks and bonds, a life settlement could be your next big opportunity. This market lets investors purchase life insurance policies from people who no longer want or need them. In return, the investor gets access to an asset not tied to the stock market’s volatility.
Investing in life settlements is a unique way to diversify your portfolio and potentially see long-term financial growth. But before diving in, you will need a solid understanding of how the life settlement process works, the types of investments available and the potential risks and rewards. This guide walks you through everything you need to know to succeed in this unique investment market.
HOW INVESTING IN LIFE SETTLEMENTS WORKS
Life settlement investing involves buying life insurance policies from individuals who no longer want to pay their premiums. You pay the policyholder a lump sum that’s more than the policy’s cash value but less than the death benefit. Once the deal is done, you take over the premiums and eventually collect the payout when the insured dies.
This process is part of a well-structured marketplace where brokers and providers play key roles. Brokers represent the sellers, working to get them the best deals and connect investors like you to these opportunities.
As an investor, determining the potential return on a life settlement involves looking at several factors, including:
- The insured’s life expectancy
- The policy’s face value
- The costs (premiums) associated with maintaining the policy
Success in investing in life settlements depends heavily on due diligence. By carefully reviewing actuarial data and financial reports to ensure the opportunity aligns with your risk tolerance and portfolio goals, you can lower your risks and improve your chances of seeing strong returns.
TYPES OF LIFE SETTLEMENT INVESTMENTS
There’s no one-size-fits-all approach to life settlement investing. Depending on your goals and risk tolerance, here are your main options.
1. Direct Purchases
This is the most hands-on option. You buy individual policies directly and take full responsibility for paying the premiums. While this can offer high returns, it also requires careful selection and ongoing financial commitment.
2. Life Settlement Funds
This approach pools your money with other investors to purchase a mix of policies. Since the risk is spread across a portfolio, it is less risky than direct purchases. Plus, the fund managers handle the details, making it an excellent option for investors who prefer a hands-off experience. The one downside is you may not get any background on the underwriting of the insureds. In addition, if a policy matures early, the fund keeps the upside returns.
3. Fractional Investments
In fractional life settlements, multiple investors share ownership of a single policy. This allows participation with lower upfront capital.
4. Institutional Investments
Large institutional investors like pension funds and hedge funds dominate this space. They buy up large numbers of policies and often negotiate favorable terms due to their purchasing power. As an individual investor, you may be able to access this market through private placements or partnerships with an initial investment of $500,000 or more.
Each type of investment comes with varying levels of risk, liquidity needs and potential for diversification. Understanding these options is essential to aligning your strategy with your investment goals and risk tolerance.
PROS AND CONS OF LIFE SETTLEMENT INVESTING
Like any investment, investing in life settlements comes with its advantages and disadvantages. Let’s examine the main pros and cons.
Pros
- Uncorrelated returns: Life settlement returns are not tied to the stock market, making them a stable investment option even during times of economic uncertainty.
- Predictable cash flow: With proper planning, you can estimate the potential payouts, giving you a level of predictability that is hard to find in other investments.
- Attractive returns: Properly managed investments can yield consistent and competitive returns, often outperforming traditional asset classes.
- Social impact: For policyholders, selling their life insurance can provide much-needed financial relief. By investing in a life settlement, you may be helping the policyholder turn an unused asset into cash when they need it most.
Cons
- Illiquidity: A life settlement is a long-term investment. It can take years before you see a payout, so you will need patience.
- Your obligation to pay the premiums: If the insured lives longer than anticipated, you must continue paying the premiums, which can erode the potential return.
- High entry costs: Direct investments in life settlements often require substantial upfront capital, limiting accessibility for some investors. Fund-based investments may reduce this barrier but involve management fees.
- Regulatory and ethical considerations: The market has its share of legal and ethical complexities. The laws regulating the life settlement market vary by state, and some people feel uneasy about its reliance on mortality predictions. Therefore, you should consider these regulatory and ethical concerns when deciding if investing in life settlements aligns with your goals.
Balancing these pros and cons will help you decide if a life settlement fits your investment strategy. Consulting with professionals with significant experience in this market can provide valuable insights and mitigate the risks.
WHY PARTNER WITH I2 ADVISORS?
The life settlements market offers a rare blend of financial opportunity and social benefit. If you’re looking for an alternative asset that can deliver steady returns while diversifying your portfolio, this market is worth exploring. However, success requires understanding the finer details and making informed decisions, underscoring the importance of working with an experienced life settlement advisor.
Investing in life settlements requires expertise, strategic planning and a thorough understanding of the market. That’s where i2 Advisors can help. With years of experience and a commitment to helping investors succeed, our team offers the guidance you need to make confident decisions.
From evaluating policies to creating custom investment strategies, we’re here to help you unlock the full potential of the life settlements investment market. If you’re ready to explore how life settlement investing can enhance your financial strategy, contact i2 Advisors today. Let us help you take the next step toward achieving your investment goals.
THIS MATERIAL IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. OTHER THAN LIFE SETTLEMENTS, I2 ADVISORS DOES NOT PROVIDE THE SERVICES DESCRIBED IN THESE EDUCATIONAL MATERIALS NOR DOES IT RECOMMEND ANYONE TO INVEST IN THE ASSETS DESCRIBED THEREIN. ALL INVESTMENTS CARRY RISK AND INDIVIDUALS SHOULD CONSULT WITH THEIR FINANCIAL PROFESSIONALS BEFORE UNDERTAKING ANY TYPE OF INVESTMENT. THIS INFORMATION DOES NOT CONSTITUTE INVESTMENT ADVICE AND SHOULD NOT BE CONSTRUED AS A SOLICITATION OR OFFERING OF ANY INVESTMENTS DESCRIBED THEREIN.