Financial Poise
Investing in life settlements

A Brief Overview of Investing in Life Settlements

  • Tags: PE,

The Past and Current Climate of Life Settlement Investment Funds

Americans are living longer, but their retirement funds are not. With greater financial instability comes a need for quick income, and many seniors are taking advantage of life settlements—the sale of a life insurance policy to a third party in exchange for a lump sum greater than the value of the surrender value but less than its death benefit. It’s a helpful solution for seniors, but also a profitable asset for investors. Investing in life settlements provides investors greater diversification with low risk.

The History of 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.

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.

Life Settlement Investment Funds 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”.

Asset management firm Conning reported in 2018 that $200 billion in life insurance will be lapsed or surrendered annually through 2027–showing the potential growth for life settlements. And in 2019, Conning predicted continued growth in the market. Steve Weberson, Head of Insurance Research at Conning, stated, “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.”

This asset class has been the subject of many studies by research firms and business schools. The London Business School found that investing in life settlements can provide a return of more than four times the policy’s cash surrender value.

The Benefits and Risks of Investing in Life Settlements

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.

But investing in life settlements can also come with risks, especially if one invests in an individual life settlement rather than a life settlement investment fund. Funds provide investors with access to more diversified policies. Additionally, investing in a life settlement requires the investor to pay the policy’s premium over the course of the senior’s life. So, the investment may be less profitable if the person lives longer than expected.

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.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds and Goal Based Investing- Planning for Key Life Events. This is an updated version of an article originally published on November 9, 2018.]

©All Rights Reserved. August, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™

Share this article:

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. Share this article:

Read Full Bio »   •   View all articles by Gary Opp »

Article Comments

  • Larry C. says:

    Want to know about investing in life Settlements

  • Dixon Bradbury says:

    Gary, Would love to hear more about how you see the Life Settlement space growing in the coming years and the measures you see the industry needing to take for large scale adoption on both a retail investor and institutional side.

  • >