Life Settlements - High Yield Alternative Investments

Life Settlements are becoming an increasingly popular investment choice AND income method for people on both sides of the transaction. There are various types of such transactions, but consider the following basic example and then the benefits to both parties below:

Example Life Settlement Policy Seller: A person has a sizable life insurance policy with Prudential, or one of the many other insurance providers but they find themselves in a cash-constrained situation. They don't have any heirs or they don't necessarily rank making their heirs rich over their own well-being, so they opt to sell of their life insurance policy now rather than wait until death. Therefore, they're able to free up the cash owed at death now, while they're alive, for whatever their current cash need is. It might be to stave off bankruptcy, to stay in their home, or to cover medical costs.

Example Life Settlement Investor: On the other side of the equation, investors are willing to front the money to the policy holder now, but they obviously expect a reasonable return. A party (typically an insurance agent, financial advisory firm, hedge fund, etc.) facilitates the transaction by calculating what sort of premiums would reasonably be expected over the anticipated remaining term of the policy holder's life and then they add in an assumed return. To minimize risk, they may set up a fund of hundreds or even thousands of such policies.

From an actuarial standpoint, by diversifying risk across many policy holders, it becomes relatively easy to predict what the final return over time is going to be on a pool of insured policy sellers.

Benefits to Investors

Investment tracking software calculates the annualized returns on these investments are often 7%, 8% or more. This type of high yield return, mixed with the lack of correlation to bonds and equities makes this an attractive alternative investment. There are some risks and uncertainties to consider below as well. One of the key reasons the returns are so high is that investment funds are usually locked up for a long period of time and there's no liquid tertiary market for life settlements. So, if you plan on investing, make sure it's long-term funds, not near-term investment money.

Benefits to Policy Holders Selling a Life Settlement

As in the example, the policy holder can get cash in hand now, rather than enriching an estate or heirs later. Frankly, the intent of life insurance shouldn't really be to make people rich anyway. It should be to hold over a family during a time of unanticipated death to replace expected income. But often times, with the kids out of college and a couple firmly into retirement collecting a suitable fixed income, what's the point of continuing to carry a lucrative life insurance policy. For people like this, it might make sense to enjoy the cash while they're alive and they're no longer taking on the same risk they would have had they done it decades earlier.

How to Invest in Life Settlements

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