Life settlement investment has emerged as an alternative asset class that provides investors opportunity to profit from buying life insurance policies. It allows policy owners to sell their unneeded or too expensive policies for immediate cash value. For investors, it gives them chance to acquire policies at discount and collect death benefits when insureds pass away. Although controversial, it unlocks value in insurance policies and generates stable returns uncorrelated to financial markets. With proper due diligence, life settlement investment delivers steady cash flows with predictable mortality schedules.
Life settlement investment profits from mortality arbitrage – buying policies below fair value
The key premise of life settlement investment is that insured individuals may outlive their need for a policy or can no longer afford premiums. This creates chance for investors to acquire policies for less than their fair actuarial value. The insurer has priced the policy based on average life expectancy, but the individual seller has health issues implying shorter lifespan. This mortality arbitrage allows life settlement investors to profit the spread between discounted purchase price and ultimate death benefit collected. With accurate life expectancy evaluation, expected returns can be modeled across a portfolio of policies. Proper diversification minimizes risk and generates steady yields over an average 5 to 10 year horizon.
Conducting due diligence is critical for evaluating life settlement deals
Because life settlement investment depends on mortality arbitrage, proper due diligence is essential before committing capital. Investors must evaluate insured individuals’ health conditions and medical records to accurately estimate life expectancy. Independent LE evaluation from multiple underwriters provides objective basis for pricing. The insurer and face value of policy must be reviewed for credibility. Ongoing premium obligations need to be modeled and matched with expected mortality schedules. Policy servicing and claims processing must be handled professionally over decades long duration. With so many clinical and legal factors, investors are wise to rely on established life settlement experts for sourcing and managing deals.
Life settlement returns are stable and uncorrelated to financial markets
A key advantage of life settlement investing is stable yields derived from mortality credits, rather than volatility of financial markets. The returns depend on lifespans of insured individuals, not interest rates or economic cycles. This results in steady IRRs consistently between 8-15%, outperforming many fixed income investments. The asset class provides true diversification for investors seeking alternatives to correlated stocks and bonds in their portfolio. With predictable actuarial mortality models, life settlement investments generate uncorrelated returns for stabilizing overall performance. As the secondary market matures, it becomes more efficient for matching policies to investors with aligned risk preferences.
Critics argue life settlement investment raises ethical concerns
Life settlement investing has critics who argue profiting from human mortality is unethical. They claim it preys on vulnerable seniors who may not fully understand what their policy is worth. Others counter that it simply transfers an asset at fair value, unlocking liquidity the seller desires. Strict regulations protect consumers from outright fraud or coercion. Investors must weigh ethical factors themselves. Most agree terminally ill policy owners should have right to derive value from their policy asset. However, healthy seniors could potentially live many years so face greater information disadvantage in sales. Ultimately, consumers are free to keep or sell their policy, but professional advice ensures informed decisions.
With proper structuring, life settlements can provide stable portfolio diversification
For accredited investors, life settlements offer a proven alternative asset class to diversify their portfolio beyond traditional stocks and bonds. The returns rely on science of actuarial models, not market volatility. Although ethical factors merit consideration, consumers have right to derive value from the asset. With help of experienced life settlement experts, investors can incorporate policies into a structured portfolio matched to their risk preferences and return objectives. As the secondary market matures, increased efficiency and data should further smooth out returns over long-term holding periods. For those willing to analyze medical and legal intricacies, life settlement investing can deliver steady yields uncorrelated to broader financial markets.
In summary, life settlement investment allows profiting from mortality arbitrage in life insurance policies. With comprehensive due diligence of medical and legal factors, the asset class offers stable yields between 8-15%. By providing diversification and reduced correlation to financial markets, life settlements enable portfolio stabilization and improved risk-adjusted returns.