Financial Poise
investing in life settlements

A Brief Overview of Investing in Life Settlements

Editor’s Note: This is an updated version of an article first published on February 26th, 2014.

The Past and Current Climate of Investing in Life Settlements

The legality of investing in life settlements traces back to a 1911 Supreme Court decision, Grigsby vs Russell, 222 U.S. 149. To pay for an operation, a patient sold his life insurance policy, plus payment for remaining premiums, to A.H. Grigsby, the doctor. The patient died a year later.

Grigsby tried to collect the benefits, but an executor of the patient’s estate challenged this. The grounds were that the policy had previously been sold to a third party (Grigsby) who had no insurable interest in the insured.

The Supreme Court ruled in favor of Grigsby and held that anyone who owns a life insurance policy has a right to:

  • Sell the policy to a third party (that is, make a “life settlement”);
  • Change the beneficiary designation;
  • Borrow against the policy; and
  • Assign the policy as collateral for a loan.

Grigsby created an alternative asset class, though one that remained very quiet and largely unknown outside of discrete, private transactions for the better part of a century.

AIDS Epidemic Brings Attention to Life Settlements

Fast forward to the 1980s to the start of the AIDS epidemic. Shorter lifespans and expensive treatments created a secondary market for life insurance policies being sold to brokers for a lump sum. In turn, these brokers resold the policies to investors.

[Editor’s Note: To brush up on the basics of investing, check out our webinar “Basic Investment Principles 101.”]

At this time, there was little governmental regulation overseeing these transactions, known as “viatical settlements.” Furthermore, because new treatments were being developed to combat the AIDS virus, assumptions about estimated life expectancies of the insured were often incorrect. Investment returns suffered and litigation ensued.

Shorter lifespans and expensive treatments created a secondary market for life insurance policies being sold to brokers for a lump sum.

Life Settlements as an Asset Class Today

The dust started to settle in the 1990s and new legislation was enacted to help create tighter regulatory oversight. Policy portfolios were bundled together and sold in a process called “securitization.” These developments led to a renewed interest in this asset class, now commonly referred to as “senior life settlements” or the “longevity-linked asset class”.

This asset class has been the subject of many newer studies by research firms and business schools. In 2013, the London Business School conducted a study that took place over 10 years and studied 9,000 policies. The study found that investors gained four times the yield from the market.

A Wharton Business School study also found favorable returns for participating investors. However, it should be noted that this may drive up policy premiums overall.

Here are some reasons investors may look toward investing in life settlements.

  • Life settlements have no correlation to traditional markets and asset classes.
  • The investor knows up front how much he or she will make on the investment.
  • Life settlements have a potential for 10% or more annual fixed returns with low risk.
  • Upon maturity, the investment payout comes from highly rated U.S. life insurance companies.
  • Qualified and non-qualified funds can be used to invest. This helps in planning for retirement income.

Life settlements have not always been the best investment, but they’ve evolved over time. Throughout the last few decades, investing in life settlements has proven to be reliable and lucrative in many ways.

Like what you just read?

Then sign up to receive our weekly Financial Poise newsletter, our take on the most relevant and topical business, financial and legal issues affecting investors and small business owners.

Always Plain English. Always Objective. Always FREE.

About Gary Opp

Gary Opp is the owner of Redwood Alternative Investments and is a well-respected estate planning specialist/investment advisor with 18 years of experience.

View all articles by Gary »