Life settlements investments have emerged as a unique alternative investment asset class in recent years, appealing to institutional investors like pension funds, family offices and endowments. As the global population ages and life expectancy increases, the life settlements market is expected to grow substantially. This article provides an in-depth look at what life settlements investments are, their key benefits and risks, major players in the market, and the investment performance of life settlements funds. We will also examine the future outlook for this alternative investment and why it can be an attractive addition to a diversified portfolio.
Life settlements provide stable uncorrelated returns not tied to broader financial markets
The returns generated from a life settlements portfolio come primarily from the death benefits paid out when the insured individuals pass away. As such, the investment performance is not correlated to volatility in equity markets, changes in interest rates or other macroeconomic factors. This makes life settlements an effective portfolio diversifier. The predictable mortality rates of the insured population translates into a steady return stream for investors. Top-tier life settlements funds have delivered annual returns in the 8% to 15% range over the past decade, with low single-digit volatility.
Rigorous underwriting and portfolio construction minimizes risk
Reputable life settlements fund managers rigorously underwrite each policy they purchase to build diversified portfolios across medical conditions, gender, age bands and insurance carriers. This minimizes risk and provides stability of returns. The due diligence process involves detailed actuarial analysis of projected mortality rates and life expectancy. Ongoing monitoring of insured individuals also ensures no deterioration in health or lifestyle factors. The insurance policies underlying life settlements funds are also heavily regulated by state insurance commissions, providing an extra layer of consumer protection.
Major institutional investors have deployed billions into life settlements
Many pension plans, endowments and family offices have allocated to life settlements funds over the past decade, attracted by the stable yields. Prominent institutions investing in this asset class include university endowments like Notre Dame, Michigan and Purdue, public pension funds like Los Angeles Fire & Police, and insurance companies like John Hancock. Wall Street firms such as Apollo, Blackstone and KKR have also set up life settlements investment platforms. This strong institutional demand has led to over $30 billion being deployed into life settlements funds currently.
Aging demographics coupled with pension risk transfers will drive growth
The secular trend of aging populations across the developed world will be a long-term catalyst for the life settlements market. With 10,000 baby boomers hitting retirement age daily in the US, the supply of seniors looking to sell their unwanted life insurance policies for extra income will rise substantially. The pensions crisis and shift from defined benefit to defined contribution plans is also spurring pension risk transfer deals, where insurers take over corporations’ pension liabilities. This results in insurers looking to offset their own mortality risk through acquiring life settlements.
Life settlements provide portfolio diversification and stability
For investors seeking alternatives to conventional stock and bond investments, life settlements funds can provide diversification along with stable yields. The COVID pandemic demonstrated the value of uncorrelated return streams compared to highly volatile equities. With its low market risk profile, predictable returns, and disconnection from broader economic conditions, life settlements merits consideration as a portfolio diversifier.
Life settlements investments offer a compelling value proposition of steady yields, low volatility, low correlation to financial markets, and portfolio diversification. The demographic trends underpinning this market are strengthening, leading to robust growth in assets under management and deal flow. For institutional and accredited investors looking to diversify beyond traditional securities, life settlements funds are an alternative worth evaluating.