As an alternative investment, life settlement funds are gaining popularity with those seeking investment alternatives outside of the stock market. This is no surprise. After all—most retirement plans and 401(k) accounts rely on stock market speculation for gains. As investors grow increasingly wary of stocks running out of steam after a nearly decade-long rally, they are seeking alternatives. In this article, we will look at three ways a life settlement fund can help seniors retire with more money in their pockets.

First, let’s review the definition of a life settlement and a few basics.

What is a Life Settlement? How do they work?

Life settlements represent the secondary market for life insurance. A life settlement is created when a policy owner sells their life insurance policy. The policy is transferred to a third party in exchange for an immediate cash payment.

Many people don’t know that a life insurance policy can be bought or sold, but life insurance has been considered a salable asset since a Supreme Court ruling in 1911. Much like the deed to a home or piece of property, a life insurance policy is private property that can be assigned or sold to others by the policy owner.

Life settlement funds are comprised of policies sold by seniors (typically in their eighties) who no longer want or need them for a variety of reasons. The purchaser is typically an investor (or rather, a life settlement investment fund or an intermediary for an investment fund). They assume responsibility for any future premium payments and receive the death benefit after the death of the insured.

The senior who sells the policy exchanges their future death benefit for a living benefit they can use now. The payment they receive is more (sometimes several times more) than the policy’s cash surrender value, but usually far less than the death benefit that heirs would have received.

And this is the first way that life settlements can give seniors more in retirement:

#1: Some seniors supplement their retirement by selling their life insurance policies.

At a recent conference held by the Life Insurance Settlement Association (LISA), keynote speaker Dan Veto spoke to attendees about how aging baby boomers will transform the way we think about, plan for and live out retirement in America. “There are a number of powerful forces that are reshaping retirement in America, including the growing gap between the average life expectancy and the average retirement age.” Veto is the senior advisor at Age Wave, a consulting firm that specializes in understanding the aging population. For seniors facing this growing gap between retirement age and life expectancy, Veto says life settlements are “an option for seniors to generate income to help fund their retirements.”

Before the life settlement industry arose, seniors who no longer wanted or needed their policies simply surrendered them back to the company. In exchange, they would receive the cash surrender value, which may represent only pennies on the dollar compared to the face value, which is the death benefit or total value of the policy. By selling their policy rather than surrendering it, qualified seniors may be able to sell their policies for several times the cash surrender value.

#2: Life Settlements are an effective strategy for asset growth.

Life settlements began as an institutional investment, utilized by corporate investors such as investment banks, pension funds, hedge funds, even other life insurance companies. Recently, Warren Buffet (through Berkshire Hathaway) and Bill Gates have invested billions in life settlements. No longer just for institutional investors, in recent years, life settlements and life settlement funds have become available to accredited investors. (An accredited investor has a net-worth of one million, not including home equity, or income of at least $200k/year for individuals, $300k/couples.)

Some of the reasons accredited investors favor life settlements for asset growth include:

A life settlement has a known future value. Most investing involves “hope.” The investor buys a stock or other asset at a particular price and hopes it will go up in value! With a life settlement, the future value of the asset is known. The exact rate of return is not known, however, because the time frame for the future value to be realized is not known.

Life settlements can provide attractive rates of return. While past returns are no indication of future returns, life settlements often provide returns in the single digits to low-double digits. Research from the University of Connecticut and the London Business School has confirmed this range. In the last few years, the rising cost of insurance (COI) within universal life policies may have decreased returns somewhat by increasing costs for the investor. We have never personally seen a life settlement fund not produce a profit, which is more than we can say for mutual funds. (Of course, there are no guarantees of performance and investors should be aware of risks.)

Life settlement funds provide true portfolio diversification. They provide a profitable way to invest in the stable, solid life insurance industry—without having to purchase a new policy. Life settlement funds provide more reliable returns, while investors who purchase individual policies (or fractions thereof) experience greater volatility.

Life settlement fund returns are not dependent upon you. Unlike real estate investments, business partnerships, or choosing stocks, life settlement funds are a truly hands-off, buy-and-hold investment. The investor has purchased an asset with a stated future value at a discount to its face value. The only variable is time, which impacts the cost of the fund.

Life settlements are a true “win-win” investment: Seniors that no longer want or need their permanent insurance policies can always surrender them in exchange for the cash value, but if they can sell the policy for more, they benefit. Investors and seniors who sell their policies both benefit. 

If you are accredited and if want to grow your assets and you have a time frame of at least 7-10 years to do so, life settlement funds are worth considering. Life settlements can be held inside or outside of a retirement fund (self-directed IRA).

#3:  Life settlement funds can be an effective hedge against market volatility.

The last thing you want is to see your investments cut in half before—or especially after—you retire! Yet that is exactly what has happened to those invested primarily in stocks when the dot-com bubble popped, then again during the Financial Crisis.

Life settlement funds are favored by investors seeking a more diversified asset allocation. Non-correlated assets are the best hedge against stock market losses and fluctuations. Life settlements are especially appealing because they are based on actuarial math, not the rise or fall of markets. Because of this, they are virtually immune to volatility, market swings, and other external factors.

Life settlement returns are unaffected by:

  • Stock market corrections or crashes, domestic or abroad.
  • Real estate market losses.
  • Interest rate fluctuations.
  • The bond market.
  • Elections or political drama.
  • Unrest, war, or terrorist attacks.
  • The price of foreign currencies.
  • The price of gold or other precious metals or commodities.

This does not mean that life settlements are completely bullet-proof. Life settlements must be selected by professionals with care. Life settlement funds must be managed. Unexpected factors outside of those listed above could potentially affect the life settlement industry. Of course, this is why smart investors seek to balance investments among multiple asset classes.

Should a Life Settlement Fund Be Part of Your Strategy?

Since it’s impossible to plan what the future will hold or how the stock market will perform, a life settlement fund can be a savvy addition to your portfolio. Warren Buffet likes the asset class so much, Berkshire Hathaway now has a subsidiary—Berkshire Settlements—that invests in life settlements. Could life settlements help you balance your portfolio and hedge against the unexpected?

The life settlement market is healthy and we expect that it represents an opportunity for years to come, both for investors and those who wish to sell their policies. Darwin Bayston, president and CEO of LISA stated at their Fall Conference, “As more seniors become aware of the fact that their life insurance policies could be assets they can sell to generate immediate cash, the life settlement industry will continue to enjoy steady growth as an alternative to lapsing or surrendering a life insurance policy.”

Find out more about life settlements in this article: “Life Settlement Investments: Pros, Cons and Facts.

If you are an accredited investor, you can receive further information by sending us an email with “Life Settlement fund information” in the subject line. We’d love to answer your questions, and we have additional information including a 10-minute video we will send to you.

Are you already retired and desiring more immediate income from your current assets? In that case, life settlements may not be an appropriate investment. We invite you to book an appointment so that we can learn some basic information about your situation. We can likely recommend other strategies to increase your income!