A Brief Overview of Investing in Life Settlements

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, which is 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 and a profitable asset for investors. Investing in life settlements provides investors with 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
• 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 and 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 the 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 settled 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 called ‘senior life settlements’ or the ‘longevity-linked asset class.’

In 2019, 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.” With an estimated 10,000 baby boomers reaching retirement age each day, the number of policies continues to grow.

This asset class has been the subject of many studies by research firms and business schools.

The Benefits and Risks of Investing in Life Settlements

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

• Life settlements do not correlate with traditional markets and asset classes.
• The investor knows up front how much they 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 US life insurance companies.
• Qualified and non-qualified funds can be used to invest. This helps in planning for retirement income.

However, 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. FINRA and the US Securities and Exchange Commission (SEC) caution investors and policyholders about the potential risks of life settlements.

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

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

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This is an updated version of an article originally published on November 9, 2018 and updated on October 31, 2023. This article was most recently updated by the FP Editors.] 

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