Life Settlement Investment Funds: Past to Present

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People in America are living much longer than they ever have. However, some of these people are outliving their retirement savings. Great financial instability tends to be accompanied by a demand for fast income. Many seniors are capitalizing on the benefits that come with life settlements. Life settlements can be described as life insurance policies that are sold to an independent party in return for one flat sum that exceeds the initial surrender value (though that sum is much less than the initial death benefit). Life settlements can be a convenient solution for the elderly who need to generate cash and income. For investors, it can also be a lucrative asset. Life settlements offer investors a lot of diversification with reduced financial market risk.

Life Settlement History

Life settlement investments can be traced back to the year 1911 when the Supreme Court made a decision in the Grigsby vs Russell, 222 U.S. 149 case. To cover the costs of an operation, one patient sold the life insurance policy he had to his doctor, AH Grigsby. One year later, the patient passed away.

Grigsby attempted to collect his patient’s benefits. However, an individual executing the estate of the patient contested this. The argument was that the insurance policy was sold to an independent party (Grigsby) that didn’t have any insurable interest for the patient that died.

Ultimately, the Supreme Court had ruled in Grigsby’s favor. As such, a precedent was set — a life insurance policy owner had a legal right to:

  • Designate the policy as being collateral for a potential loan.
  • Borrow funds against that policy.
  • Modify the designation of the beneficiary.
  • Sell the life insurance policy to an independent party (in other words, make a “life settlement”).

Grigsby had created an asset class alternative, which stayed fairly under the radar for most of the century. In fact, the only people who were aware of it were mostly people who engaged in private industry transactions.

Life Settlements Started Getting Attention after the AIDS Epidemic

In the 1980s, when AIDS was at the top of everybody’s mind, expensive treatments and shorter lifespans led to a secondary life insurance policy market. Such policies were being sold directly to brokers at a flat rate. In exchange, the brokers resold those policies back to investors. Such transactions were called “viatical statements.”

During this time, these types of transactions experienced minimal government regulation. Further, since different treatments were in the process of development to fight off AIDS, assumptions are made about life expectancies that insured individuals had, most of which were usually incorrect. As a result, investment returns greatly suffered. Litigation soon followed.

Life Settlement Investment Funds — A Modern Asset Class

During the 90s, the dust began to settle. Legislations were drawn up to make regulatory oversight much tighter. Policy portfolios started to become combined and sold. This process was known as “securitization.” Such developments have resulted in greater interest for this particular asset class, typically called “longevity linked asset class” or “senior life settlements.”

Conning, a firm specializing in asset management, published a report in 2018 claiming that as much as $200 billion worth of life insurance would be either surrendered or lapsed yearly all the way until 2027. This put a spotlight on the potential for life settlement growth. One year later, the firm predicted ongoing growth within the market, stating:

The increased supply of investors will have a larger number of policies to select from because of the increasing number of retiring baby boomers. Additionally, the broad regulatory environment surrounding life settlements has stabilized and an increasing supply of settled policies supports the continued development of the tertiary market.

A number of different business schools and research firms have studied this particular asset class. In fact, for a policy seller, the London Business School discovered that life settlement investments have the potential to offer over 4 times the amount of a cash surrender value. That would result in an annual return of 12.5%, on average, for the average investor.

The Risks and Benefits That Come with Life Settlement Investments

  • You can use funds that are non-qualified and qualified to make investments with. This will go a long way towards putting money away for retirement.
  • Upon maturity, an investment payout will come about from American life insurance agencies that are highly rated.
  • Life settlements come with at least a 10% potential annual return (at a lower market risk).
  • Investors will know beforehand how much they can expect to make on an investment.
  • Life settlements don’t have any correlation to conventional asset classes and markets.

With that said, life settlement investing comes with a number of different risks — particularly if you invest in a single life settlement, as opposed to a life settlement investment fund. Investors will be able to access policies that are more diversified with funds. Also, life settlement investing forces investors to pay a policy’s premium throughout a senior’s life. As such, an investment might not be as profitable if an individual were to live much longer than anticipated.

Life settlements were always an optimal investment, however, over time, they have drastically evolved. Over the last several decades, life settlement investing has actually been quite lucrative and reliable for many people.

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