Life settlement investment funds have emerged as an alternative investment strategy that provides steady returns with low volatility. As the U.S. population ages, the life settlement market has grown rapidly, attracting institutional investors seeking diversification and stable cash flows. This article provides an overview of how life settlement funds work, their key benefits and risks, major players in the market, and the growth outlook for this asset class. We will also examine the pros and cons of life settlements compared to traditional investments like stocks and bonds. With trillions in life insurance policies that may lapse or be surrendered, life settlement investments present a compelling opportunity for qualified investors looking to expand their portfolios.
Life Settlement Investments Offer Attractive Risk-Adjusted Returns
Life settlement funds purchase life insurance policies from seniors at a discount to the death benefit and continue paying premiums until the insured passes away. The key driver of returns is the insured’s life expectancy – the shorter it is, the higher the return. By aggregating a pool of policies, fund managers can provide annual returns in the 10-15% range with minimal volatility. This compares favorably to equity and bond markets that can experience large swings in any given year. Life settlement returns have historically had a low correlation to traditional assets, making them an excellent portfolio diversifier. Fund managers apply rigorous medical underwriting to accurately price policies based on each insured’s health profile and life expectancy.
A Large and Growing Investible Universe
The U.S. life insurance market totals over $20 trillion in face value policies and 1.4 billion individual policies. However, it is estimated that over 88% of these policies lapse or are surrendered before paying out a death benefit. This creates a vast pool of policies that can potentially be acquired in the life settlement market at attractive discounts. As baby boomers age into their 70s and 80s, the secondary market opportunity is accelerating rapidly. According to Conning Research, the life settlement market grew 28% in 2018-2019 alone as institutional capital continues to enter the space. Major players include pension funds, endowments, sovereign wealth funds, and private equity firms like KKR, Blackstone, and Apollo Global.
Professional Underwriting Mitigates Risks
While the insured’s lifespan drives returns, fund managers use rigorous actuarial underwriting and portfolio construction to minimize risk. Policies are sourced only from highly-rated life insurance carriers to ensure creditworthiness. Insureds are evaluated by independent medical underwriters who examine medical records to estimate life expectancy. Funds will diversify across insureds’ gender, ages, and health conditions to avoid concentration risk. Portfolios are also structured to generate sufficient cash flows from earlier maturing policies to cover premiums payments on remaining policies. High-quality fund managers have in-house underwriting expertise and proprietary pricing models to accurately project returns.
Less Impact from Market Volatility Than Bonds or Stocks
A key advantage of life settlements is their low correlation to capital markets. Returns are not dependent on economic growth, interest rates, or market cycles. Because life expectancies change very slowly, returns are stable and predictable. The death benefit payouts from insurance carriers are contractually guaranteed and highly-rated carriers have strong credit quality. This contrasts with stocks and bonds that can experience large drawdowns when markets decline. Life settlement funds preserved capital during the 2008-2009 financial crisis while equity markets lost over 50%. For investors concerned about rising interest rates and stock market volatility, life settlements offer steady uncorrelated returns.
Suitable for Qualified Investors Seeking Stable Growth
In summary, life settlement investments funds offer an appealing way for qualified investors to earn steady returns in the 10-15% range with minimal volatility. As the largest generation in U.S. history enters their retirement years, the amount of policies available for life settlements will continue rising. For investors concerned about portfolio drawdowns or seeking alternatives to low fixed-income yields, life settlement funds present a compelling opportunity. However, the asset class is complex and comes with unique risks. It is suitable only for accredited investors who can dedicate a small portion of their portfolio to this alternative strategy.
Life settlement investments allow qualified investors to purchase life insurance policies from seniors and earn attractive returns from the death benefits. This alternative asset class provides stable income with low volatility and low correlation to traditional markets. As the population ages, the market opportunity is growing rapidly. With proper due diligence and portfolio construction, life settlement funds can be an excellent addition for investors seeking uncorrelated returns.