Life Settlements and How It Affects You – Episode 016

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host, bestselling financial author, Kim Butler with us today. Welcome, Kim. Hello, Todd. Happy to be with you today and ready to chat about life settlements for our listeners in a nice, generic way that they can do some learning about. Super. Well, life settlements is, I’ve been in this industry for about 25 years. I was made aware of the life settlement market, well, I saw it a little bit when I worked

[00:50] for the bank because at the bank, you know, a lot of the trust departments were buying these things and just came into personal contact with it about five years ago. And at first brush with it, I kind of had a problem. So if somebody’s listening and at first reaction, you feel the same way. I encourage you to hang in there, keep getting information and realize what a valuable service this provides to everyone involved, not just the investor. So with that, Kim, why don’t you kind of start us off and talk about what this market is. Absolutely. Well, I think I’ve had about 10 or 12 years of experience with life settlements and I, too, had an initial somewhat even negative reaction to it. But the life settlements has actually been in the tax code since 1913.

[01:38] And it is simply your ability as an investor to buy an existing life insurance policy from somebody that is selling it. And what the 1913 court case indicated is that this life insurance policy is a asset, is an asset class, just like a piece of real estate, just like a desk, just like anything else that a buyer and a seller can come to an agreement with and transfer ownership on. And so the life settlement industry is a new asset class for many, many people. As you said, was purchased by large institutions, banks, hedge funds, pension plans, et cetera, for many, many years. And sometime around the early 2000s became more and more available in the retail market. And in the late 2000s, it became much more well known because life

[02:31] settlement funds started to be created where the little guy could come in and spend one hundred thousand dollars and have a group just like you would in a mutual fund of stocks. You’d have a group of stocks. Well, this is a mutual fund of life settlements. You have a whole bunch of life settlements, in other words, a whole bunch of policies that you are buying. And I have to admit, I have absolutely loved this investment. It’s been very effective for our clients. And it does do a good job for the seller as well, which I love. I love it when an investment can be a win-win and the bridge loans that we talk about quite a lot are a good example of a win-win as well. But in this case, the seller is typically somebody in their 80s.

[03:13] They often have a terminal medical condition and they own a life insurance policy. And that death benefit, the life insurance policy’s death benefit can be sold for an amount that is greater than the cash surrender value of the policy. So let’s say you have a five million dollar policy and it has a million five of cash. You might actually be able to sell that for two million dollars. So it’s a win, a win for the seller. It’s a win for the investor because they spend two million and get the opportunity to get five million or in this case with a lot of our clients, that policy is put into a fund. And so a whole bunch of people spend the two million to get the five million. And it’s just a fabulous way to have a completely uncorrelated asset

[04:00] in your portfolio because it does not matter what’s going on in the stock market, the bond market, who’s in the presidency or what interest rates are doing. The old, the only thing guaranteed in life is death and taxes is true. And because these are death benefits paid by an insurance company, we can be confident in the payout. Got it. And again, you mentioned the big buzzword of the day, which is uncorrelated or non correlated, simply meaning that a portion of your investments should be separated from the market. If you’re in stocks, if you’re in bonds, if you’re in options, even to some extent, if you’re in precious metals, all of these are kind of caught up in a wheel or a system that as money moves, you can win or lose

[04:48] big time. So having something that’s non correlated, in other words, this person’s life is driven by the fact that they’re nearing the end of their human lifespan and they usually have a, a underlying health condition. There’s been a doctor’s evaluation, at least one, many times more than one of their personal health records to derive an expectancy, a life expectancy. So we know how much it costs to pay the premiums. We know when their anticipated life is supposed to end, which of course, that’s never guaranteed. And that allows us to determine a price or a value in the marketplace, correct? Absolutely. And that ability and how solid and actuarially based it is, is what gives the investor the opportunity to be very confident about low double digit

[05:47] returns and the seller to be very confident that it’s a win for them. And it is often taxed as a capital gain. It does depend, obviously IRA money can be used for it as well, in which case it has IRA tax law. But it’s an environment where the individuals at play, the managers of the fund and the investor and the seller, all handle their relationship through an escrow account. So it’s completely controlled. There’s no way that anybody can abscond with the money. And again, it gives everybody a lot of confidence. So not only do we have this non-correlated or uncorrelated asset, we have one that can subscribe to our way of thinking about risk. And anybody that has heard our conversations in the past knows that

[06:37] our risk tolerance for our own money is zero. We are not interested in losing money period. And we believe that most of our clients are not interested in losing money either. And inside the life settlement arena, the capability to lose money is, is just almost not there. And so of course, not guaranteed. We have to be careful in saying that, but it is a very, very secure return for a very, very secure product. Super. And one of the first questions that always comes up is how are life settlements related or not related to viaticals? Sure. So the definition of a life settlement is somebody that has a two year or greater life expectancy, and the definition of a viatical settlement is somebody that has less than two years.

[07:22] So typically what you see in life settlement funds, they’re known as senior life settlements because they’re dealing with people that have at least a two year, typically up to about a seven year life expectancy. And that’s important as well, because we’re not talking about a 70 year old with a 25 year life expectancy. We’re talking about an 85 or even a 90 year old with a two to seven year life expectancy. And again, actuarially based and medically underwritten. Viaticals are typically done on younger people that have a very short life expectancy often because of some type of disease. And that is not what we’re talking about. Viaticals, certainly nothing wrong with that for people that want to do that.

[08:03] But this is the senior life settlement market, completely different. Got it. And again, there, there is a sort of a stigma still in the marketplace, um, in the 1980s, in the 1990s, when AIDS was really becoming prevalent in the news, there were a lot of younger people, particularly men that were diagnosed with AIDS who needed money to fund, uh, these, uh, research programs or whatever you want to call them to try to live longer. So one of the things that they did was they sold their life insurance policies. Well, as a good news, their life expectancy of these people were extended in some cases from six months or a year to an additional 10 or 20 years. And we continue to see that get pushed out even farther, which is great,

[08:54] but it made those investments where people thought they were buying a life insurance policy with a very short rate of return extended out. So again, these are not viaticals. There are health conditions that are being evaluated, but you’re also dealing with a population that is nearing the end of their life expectancy anyway. And to me that’s important. Absolutely. We like it when we know that we’re helping other people and that’s what the life settlements do and there are a variety of funds available that provide this kind of thing. There’s a lot of information out there. There’s been good and bad without a doubt. And so people should look into this and get educated about it, get confident about the things that did go wrong in the early years when escrow

[09:42] accounts were not used and when the effort was not made to be super clear on actuarial science. Now, of course, nobody, but God knows when somebody is going to pass on, but today’s life settlement providers typically get two or three different doctor’s opinions and they have a couple different actuaries on staff that are looking at these policies. And like anything, science has been applied to this arena and it’s made it better and better for the investor. And we really like providing funds where the investor is very close to the picture and they can actually look at the variety of policies that are available and have whatever little knowledge they want to have about this arena, because we think the more information that an investor has, the

[10:32] better educated decision that they can make and the more control that they can have over their money. And as you know, control is the fifth principle of prosperity that we espouse of our seven. And while you couldn’t literally pick a policy for most investors, you could, if you were a super wealthy family, but you do have to be an accredited investor to be involved with life settlements. The definition of accredited is a million dollar net worth or two to 300,000 of income, two for a single and three for married, or I might have that backwards somewhere. Help me with that definition. Is it two or 300? I think it’s two 50 and three 50, but. Oh, okay. There you go. The rules change sometimes. So that definition of accredited investor is something that is a

[11:20] nationwide definition and some states are super picky about it. Others not so much, but one does have to be an accredited investor to invest in life settlements. But even if you aren’t there yet, obviously our goal is to get you there. And so it’s good to know that these exist. And a lot of people, they actually get to increase their confidence. Even if they can’t invest in them themselves today, maybe they’ve got a 401k plan and they know that it’s getting close to tipping them over into the accredited investor status. And if they ever leave work, they would run a roll over that 401k plan into an IRA and invest in life settlements. And it’s nice to know that those are out there because they don’t have to

[11:59] worry about investing in something where they’re 401k is going to become a 201k like happened in 2008. Super. Well, just to kind of summarize, the seller is an older person that has a permanent life insurance policy that most likely has cash value in it, but they would like to see the effect of the money while they’re living. A lot of times we see this done in conjunction with giving grants to universities or charities. They just want to do something with that money while they’re still alive. So they are able to get more than their cash value, and they are released from the obligation of making the current premiums by selling their death benefit, which is the insurance company’s promise to pay in the future upon their death.

[12:49] As an investor, I’m purchasing that death benefit by giving a cash amount of money to the seller and agreeing to pay any future premiums. Now here’s the difficulty is that, you know, if you have $500,000 or you have a million dollars and you want to buy into the life settlement arena, most of the time, even at a million dollars, you’re only talking about being able to buy one, two, maybe three policies if you’re buying those entire policies. Now we know that the law of large numbers allows us to diversify and get a consistent rate of return. So how has the market addressed that? Well, it is created life settlement funds, which enable an investor to put in, first of all, smaller amounts of money, a hundred thousand

[13:43] dollar minimum. And then second of all, for that a hundred thousand, you may end up with 30, 40 or 300, depending on the type of fund, different policies inside that fund. So a hundred thousand dollars might buy 50 policies or 300 policies, thereby heavily diversifying your asset. And that’s so important in today’s world. People know that they can’t put all their eggs in one basket. And this enables them to have high, high diversity. It also enables them to be assured that premium payments will be made because the fund handles all of those premium payments and make sure that those policies stay in force and that the premiums are made on them every single year in a very optimized fashion. In other words, you, you want to only be paying what has to be paid.

[14:34] And that’s all handled at the fund level so that the individual investor doesn’t have to deal with it. Got it. And typically as an investor, we mentioned the hundred thousand dollar minimum, what’s the timeframe of my commitment and what do those returns look like? So timeframe is typically in the seven to 10 year mark and returns are low double digits per year. So 10 or 11% per year. And many of the funds pay quarterly payouts once maturities start to occur, which is usually around the third or the fourth year. So there is some income that can come from these funds as well. I wouldn’t want to think of it as like monthly cashflow, but quarterly payouts now, of course, they’re based on maturity.

[15:18] So they’re going to be different every quarter, just whoever has died in the fund that, that quarter. Those are the ones that are going to be paid. Got it. So I commit my money, say a hundred thousand dollars to a seven year term or, or whatever it is. But if people start to mature, which means passes away in year three, again, my money starts to come back to me as these maturities happen. That’s correct. Super. Um, anything else again, uh, resources for this, I would invite people to go to partners, the number four prosperity.com. Um, any other resources or things you want to add? Well, I know that there are some additional blog posts that we’ve written about the life settlement arena. And those would be worth tracking down on partners.

[16:08] Number four, prosperity.com slash blog. And then if you are accredited or close to having that million dollar net worth, reach out to us. And we have some specific websites that we can send you to, to get additional information as some specific private placement memorandums or PPMs, which are the long legal documents that support these funds that we can send you, if that’s something that is of interest. And we’re always happy to answer questions via email and the contact us form on our website. If people have them, even if they’re not ready to invest yet, um, maybe you know somebody that is, or you are close to yourself and just want to learn about it. We love to teach. Thanks so much to my co-host, bestselling author, Kim Butler.

[16:57] This is a no BS money guy, Todd Strobel for the prosperity podcast. Take care of everybody. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.