Life settlements have emerged as an increasingly popular alternative investment over the past few decades, especially among retirees and institutional investors like hedge funds and private equity firms. As the average life expectancy rises and more seniors face financial difficulties funding their retirement, the secondary market for life insurance policies has boomed. Investing in life settlements essentially means purchasing existing life insurance policies from policyholders for more than their cash surrender value but less than their death benefit. When the insured individual passes away, the investor collects the death benefit payout from the insurance company. This article will examine the attractive features of life settlements as an investment and the major players in this market.
Life settlements offer steady returns uncorrelated to financial markets
The key appeal of life settlements as an investment is that they provide relatively stable returns completely uncorrelated to volatility in financial markets or economic conditions. The returns are driven almost entirely by accurately estimating life expectancy and purchasing policies at an appropriate discount to the death benefit. Life settlements have delivered yields between 8-15% historically, higher than many fixed income products. Large institutions like pension funds appreciate holding life settlements as a portion of their portfolio to diversify risk.
Demographic trends are fueling growth in the life settlements market
The combination of increasing life expectancy and inadequate retirement savings has created a huge supply of seniors looking to sell their life insurance policies to gain immediate access to funds. Over $100 billion worth of life insurance policies lapse or are surrendered each year. The number of seniors aged 65+ in the US is expected to double by 2060. As the enormous baby boomer generation ages into retirement, the secondary market for their life insurance stands to grow rapidly.
Institutional investors and private equity firms are getting involved
The life settlements market has matured considerably with increased participation from pension funds, sovereign wealth funds, and private equity firms. Big names like Apollo Global Management, Blackstone Group, and Warren Buffett’s Berkshire Hathaway have bought billions worth of life settlements in recent years. Their institutional expertise and access to capital has professionalized the space and made it more efficient. This should improve pricing mechanisms and enhance returns for retail investors looking to add life settlements to their portfolio.
Medical underwriting technology has improved pricing accuracy
Medical advancements and improved underwriting is reducing the risks associated with estimating life expectancy and pricing policies appropriately. Companies specializing in life settlements can now leverage big data and algorithms to more accurately predict expected lifespans. This provides investors with greater confidence that policies are being acquired at favorable discounts to the eventual death benefits. More accurate underwriting and life expectancy data has boosted investor demand.
Brokers and investment funds offer easy access to life settlement deals
In the early days of the secondary market, life settlements were complex, illiquid, and difficult to access for most individual investors. But the rise of specialized brokers and investment funds focusing on life settlements has dramatically improved access and liquidity. They source policies, analyze medical data, determine fair value pricing, handle all paperwork, pay premiums, and take care of collecting death benefits. Turnkey access to professionally managed life settlement investments has made it feasible for retail investors to add exposure and tap into this asset class.
Life settlements present an increasingly appealing investment opportunity, offering stable uncorrelated returns for retirees and institutions alike. Demographic tailwinds, participation from private capital, improved underwriting, and turnkey access are driving growth and maturity in this alternative asset class.