Life settlements have emerged as an alternative investment option that provides relatively stable returns. As the US population ages and life expectancy increases, the secondary market for life insurance policies has grown rapidly. Large institutions like hedge funds and pension plans are acquiring policies of seniors through life settlement transactions. While this asset class offers attractive yields, it also has risks. This article will analyze the benefits and drawbacks of investing in life settlements.
Life settlements provide non-correlated returns and portfolio diversification
The returns from life settlements have low correlation with traditional assets like stocks and bonds. The payouts depend on when the insured individuals pass away, not on market fluctuations. So adding life settlements to a portfolio can increase diversification and reduce risk. Many alternative asset managers are allocating a portion of their funds to life settlements to take advantage of the relatively stable cash flows.
Investing in life settlements requires extensive due diligence
Evaluating life settlements entails assessing the life expectancy of the insureds and the future premium obligations. Investors need to conduct medical underwriting and work with specialized brokers. The underwriting models have improved but estimating life expectancy still involves uncertainty. Thorough due diligence is essential before acquiring a policy.
Life settlements have high minimum investment requirements
Most life settlement deals are tailored for institutional investors. The minimum investment amount is usually several million dollars. Retail investors can gain exposure through funds focused on this asset class. But the fund fees could erode returns. The high capital requirements limit the investor base for life settlements.
The illiquidity of life settlements is a drawback
Life settlements are highly illiquid assets. Investors must hold the policies until the death of the insureds to receive the payout. The long investment horizons, often lasting decades, make life settlements unsuitable for investors who want flexibility to exit positions.
Regulations on life settlements are evolving
The life settlement industry has faced regulatory uncertainty over the years. Most states have passed laws to protect consumers, but federal oversight remains limited. As larger institutions participate, there are growing calls for more transparency and governance standards to promote ethical practices.
In summary, life settlements can potentially enhance portfolio returns due to their low correlation to other asset classes. But the complex due diligence process, high capital requirements, illiquidity risks, and evolving regulations may deter some investors. Overall, life settlements remain a niche alternative investment suited for sophisticated institutional investors.