Life settlement investment has become an increasingly popular alternative investment in recent years. It involves purchasing life insurance policies from policyholders and continuing to pay the premiums until the original policyholders pass away. Investors can make profits from the death benefits when the insureds die. There are mainly three types of companies engaged in life settlement investments: life settlement providers, life settlement brokers, and institutional buyers. Each plays a unique role in the life settlement market and has different profit models.
Life settlement providers work directly with policyholders and have various fee structures
Life settlement providers are companies that work directly with policyholders to purchase their unwanted life insurance policies. They take ownership of the policies and pay future premiums. Some examples of major life settlement providers include Coventry, Magna Life Settlements, and Lifeline Program. These companies make money through various fee structures:
– Upfront fee: Charging a flat percentage fee on the expected death benefit. This is taken out of the total purchase price paid to the policyholder.
– Deferred fee: Taking a percentage of the death benefit when the insured dies. This aligns incentives as the provider only makes money if the insured lives a shorter life than estimated.
– Hybrid fee: Combining an upfront fee with a lower deferred fee. This allows providers to get some capital upfront while still maintaining an incentive to maximize the death benefit.
Life settlement brokers match policyholders and providers for a commission
Life settlement brokers act as middlemen between policyholders looking to sell their policies and life settlement providers who purchase them. Some examples are Advanced Settlements, American Life Funding, and Habersham Funding. Brokers make money by charging a commission based on the expected profit from the life settlement transaction. This commission often ranges from 2% to 8% of the policy’s face value. Brokers are responsible for evaluating policies, determining the potential profitability, conducting auctions, and negotiating offers. Their role is to maximize the offer price and get the best deal for the policyholder. The broker commission provides the incentive and revenue for brokers to continually source new policies for life settlement providers.
Institutional buyers invest in policies and earn returns on death benefits
Institutional buyers are large financial institutions that invest in life settlements to earn above-average returns for their clients. Some prominent examples are Goldman Sachs, Credit Suisse, and Warren Buffett’s Berkshire Hathaway. These institutions pool capital from investors into funds that purchase large portfolios of life settlement policies. The funds take over premium payments on the policies. When insureds pass away, the death benefits are paid out to the funds. Investors in the funds then receive returns based on the total death benefits collected over time. Institutional buyers have the scale and access to capital markets to invest in policies. They provide portfolio diversification benefits and allow everyday investors exposure to this asset class through fund offerings.
In summary, the three major types of life settlement investment companies are providers, brokers, and institutional buyers. Each serves a key function and takes a cut of the profit from policies for their role. This allows the life settlement market to operate efficiently in matching policyholders and capital.