Stock market returns can be unpredictable, but life settlements offer investors an alternative option to grow their money outside the usual ups and downs of stocks and bonds. But are they the right move for you?
Let’s break down what life settlements are, why they might deserve a spot in your portfolio, and how to decide if they fit your financial goals.
WHAT ARE LIFE SETTLEMENTS?
Life settlements are deals in which someone sells their life insurance policy to an investor for a lump sum payment. It’s an attractive investment option because you’re buying these policies at a discount when compared to their full value, allowing room for better returns. Policy sellers usually have to meet investor requirements, such as being of a certain age or having a death benefit over a specific amount, such as $100,000.
Life settlements represent a growing market as more people realize they can turn their insurance policies into cash. Industry reports such as Conning’s 19th annual market report show steady growth for these investments. The report’s author, Roberta Lauria, estimates the average annual face amount of new life settlements to be $5 billion.
HOW DOES A LIFE SETTLEMENT WORK?
Imagine someone with a life insurance policy decides they no longer need or want it. Instead of letting it lapse, they sell it to an investor for a lump sum. As the investor, you take over the premium payments and eventually collect the payout when the insured person passes away.
Another way to invest in life settlements is through life settlement funds. These funds hold many life insurance policies and help diversify your investment portfolio. That way, the impact of any policyholder living longer than expected isn’t as significant.
The downside is that you don’t see the specific policies in the fund, so it’s crucial to know how investments are selected and managed. Similar to mutual funds, life settlement funds come with management fees that can impact your overall returns. You’ll have to weigh these costs in your decision to make sure your returns are worth it.
IS INVESTING IN LIFE INSURANCE A GOOD IDEA?
Investing in life settlements could be a smart move if you want stable returns, a more diversified portfolio and a way to avoid market fluctuations. Below are nine benefits you can look forward to.
- Potential higher returns: Life settlements often perform better than other fixed-income investments like bonds or annuities. With annual returns typically in the 11% to 13% range, it can be a solid return on your investment.
- Fewer market swings: Since life settlements don’t depend on stock prices or economic conditions, owning them can feel much less stressful. The value in life settlements is tied to factors like the insured’s life expectancy, not the Dow Jones.
- Strong performance during economic downturns: Similarly, unlike traditional investments that may falter during economic recessions, market volatility doesn’t affect life settlements. This makes them reliable for preserving and growing wealth even in challenging financial times.
- Predictable payouts: With a clear understanding of premium and eventual payouts, you can more easily pair your financial strategy with your long-term goals.
- Better portfolio balance: Adding life settlements to your portfolio gives you access to a unique asset that spreads out your risk and adds stability to your overall returns.
- Regulatory safety: There are rigid regulations in the life settlements market to protect both you and the policyholder. Full transparency is required for the investment terms, ensuring you understand all the risks, fees and potential returns before committing your money. You’ll always know what you’re signing up for.
- Helping people: When you invest in a life settlement, you help policyholders get cash when they need it most. Your investment has a real-world impact, whether that’s to pay for medical bills, a needed vacation or any other expenses.
IS A LIFE SETTLEMENT RIGHT FOR YOU?
Life settlements aren’t for everyone, but they could be a perfect fit if you:
- Are patient: These are long-term investments. You’ll need to be comfortable waiting for payouts, which depend on life expectancy.
- Can handle some risk: While the returns are generally steady, there’s always a chance the insured lives longer than expected, delaying your payout.
- Qualify: Many opportunities in this space are limited to accredited investors because of the complexities of these investments, which include understanding actuarial data, estimating life expectancy and navigating regulatory requirements.
- Don’t need immediate liquidity: Life settlements aren’t as easy to cash out as stocks or mutual funds, so they work best for people who don’t think they’ll need the money anytime soon.
- Have experts in your corner: Specialized life settlement firms can help you navigate the market by providing insights into selecting the right policy. They will educate you so you can make informed decisions aligning with your investment goals.
2 Common Myths About Life Settlement Investments
Despite their growing popularity, life settlement investments are often misunderstood. Let’s look at a couple of myths and the reality behind them.
Myth #1: Life settlements are unethical. Some worry that these investments exploit vulnerable individuals. In reality, policyholders sell their policies to access the money when they need or want it. It’s often used to cover essential expenses, making it a mutually beneficial transaction.
Myth #2: Life settlements are too risky. While all investments carry some level of risk, life settlements are backed by regulated policies and legal contracts, providing a level of security that appeals to many investors.
WHY LIFE SETTLEMENTS DESERVE A SPOT IN YOUR PORTFOLIO
Life settlements are worth exploring for investors who want steady returns, less market drama and a way to make a positive impact. With the right strategy and a clear understanding of how they work, you may find that life settlements are the missing piece in your investment portfolio.
Ready to see if life settlements are the right fit? Reach out to i2 Advisors today and start the conversation.