Life insurance settlements have emerged in recent years as a niche alternative investment that offers potentially high returns, but also comes with significant risks. The basic concept involves investing in life insurance policies of seniors or terminally ill patients who can no longer afford their premiums. The investor pays the premiums and then collects the payout when the insured person passes away. As morbid as it sounds, returns can be quite lucrative given the discounts on policy prices. However, there are many issues around ethics, legal complexities, and predicting life expectancies accurately. Overall, investing in life settlements requires deep due diligence and should only be considered by qualified investors.
Life settlements let investors profit from seniors unable to afford policies
The life settlement market came about because many seniors end up lapsing on their life insurance policies as they grow older, often due to rising premium costs or shrinking incomes. This creates an opportunity for investors to buy out these policies at a discount, continue paying the reduced premiums, and collect a windfall when the senior eventually dies. The longer the insured person lives beyond expectations, the higher an investor’s return. However, the ethics around profiting from others’ deaths have appropriately been called into question. There is also the grim reality that investors have financial incentive for insured people to die sooner rather than later.
Predicting life expectancy is complex and risks are amplified by volatility
Valuing life settlements requires accurately assessing an insured person’s life expectancy, which is extremely difficult for any single doctor or medical professional to predict reliably. Small errors can greatly swing returns in either direction. Furthermore, many policies get resold in secondary markets, adding more uncertainty and volatility around death benefits for downstream buyers. The amplified risks from unpredictable life spans and policy resales make this a dangerous investment if proper due diligence is not done.
Regulations aim to constrain predatory practices but costs and access are barriers
Given some of the ethical issues around profiting from others’ deaths, life settlement investments have come under tighter regulations over the past decade. These added constraints make the business more transparent and less prone to predatory actors, but also raise the costs of investing. The heightened legal and financing expenses also make life settlements inaccessible to smaller individual investors, concentrating activity amongst institutional players. So while returns can be alluring on paper, realistic access to properly vetted investments remains out of reach for most.
Niche market with need for ethical standards but attractive returns for qualified investors
In summary, investing in life settlements resides in a ethically questionable niche of alternative investments that most retail investors should probably avoid. However, for qualified institutional investors able to take on the legal and financing costs, as well as accurately predict life expectancies, returns can be extremely lucrative given the policy discounts. But transparent accounting, ethical standards, and clear regulations are absolute necessities to prevent predatory behavior in this market.
While investing in life settlements promises high returns, the ethical pitfalls, volatility risks and barriers to entry make it an alternative investment suitable only for specialized institutional investors. Improved transparency, medical advancements and fair standards can help make this a less grim business.