Life Settlements: Pros, Cons and Facts About Life Settlement Investments

“This might be the best investment you’ve never heard of.”
– Kevin Nichols, private equity fund manager

Are You an Investor Seeking Stock Market Alternatives?

We think people are tired of the word “investments” meaning only the stock market. In broker-dealer circles, even “alternative” investments often refer to products within the mutual fund world, such as REITs (Real Estate Investment Trusts that are securities, not property) or mutual funds that invest in precious metals.

By contrast, life insurance is an entirely different beast, based on actuarial math rather than the rising and falling of stocks, funds, and indexes (though NOT classified as an “investment”). However, there is a life-insurance based investment that has been gaining popularity with many corporate and sophisticated investors: life settlements.

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Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements. Even Warren Buffett invests in life settlements. And life settlement investments are poised for big growth in the coming years. According to a 2018 study by the investment management firm Conning, $200 billion in life insurance is set to be surrendered or lapse every year until 2027.

So what exactly are life settlements? Read on to discover the basics about life settlement investments, the pros and cons, and who is a suitable candidate.

Life Settlements – Facts and FAQs 

What are Life Settlements, anyway?

Just like a real estate deed or a mortgage contract are assets that can be sold, so life insurance contracts are also salable assets. SEC.gov gives this basic definition of life settlements:

In a “life settlement” transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value.

The investor (which may be an individual, a private equity fund, or an institution) then maintains the policy, pays any additional policy costs or premiums, and collects the death benefit when the insured passes.

Of course, the investor considers the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy. They also must verify that the policy will meet the conditions of a legal life settlement, as policies purchased under false pretenses or only for the purpose of re-selling to an investor may be uncollectible.

Why would someone want to sell their life insurance policy?

There are many reasons that someone may no longer need or want their life insurance policy. Some common reasons include:

  • A spouse may have passed and other children/heirs are self-sufficient
  • The insured may have divorced or have no heirs they wish to leave assets to
  • Funds may be needed to pay for long-term care or healthcare costs
  • Changes in estate or tax law may cause an individual to consider lapse or surrender of a policy
  • The policy owner has fallen behind in payments, experienced a change in their personal finances, or wishes to halt remaining premium payments
  • A desire for cash arises, whether to purchase a retirement home or fund a grandchild’s college tuition

For whatever reason, the current policy owner decides that they would rather have to figure out what to do with a large sum of money instead of keeping their insurance policy. They wish to trade their death benefit for a living benefit that they can use in their remaining years.

How Long Have Life Settlements Been Around?

In a Supreme Court ruling dating back to 1911, Justice Oliver Wendell Holmes Jr. delivered the majority opinion that would lay the groundwork for life settlements. The ruling came in the case of Grigsby vs. Russell and established life insurance contracts as salable assets.

R. L. Russell was the executor of John Burchard’s estate. Burchard had passed away about a year after an operation. However, in order to afford the operation, Burchard had sold his life insurance policy to Dr. Grigsby in exchange for the operation plus $100. When the insurance company paid Dr. Grigsby instead of the estate, Russell sued to have the proceeds paid to the estate.

The case went all the way to the Supreme Court, and the court affirmed that Burchard had the legal right to sell his policy and Grigsby had the right to purchase it. The issue at the heart of Justice Holmes’ opinion is as such:

“…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property…To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

The practice of buying and selling policies became much more popular in the 80s with the rise of the HIV virus. “Viatical settlements,” as they became called, allowed a terminally ill policy owner to sell their life insurance policy for more than the cash surrender value.

In the years since, life settlements, also known as “senior settlements,” became popular both with institutional investors not to mention very elderly or unwell seniors who were needing to know how to use life insurance strategically. The financial instability experienced by many as a result of COVID-19 has likely led many individuals to seek settlements for their policies, either because they needed the cash to cover lost wages or other expenses, or because a loss of employment made it difficult to pay their premiums.

Do Life Settlements Belong in Your Portfolio?

What Are the Advantages of Life Settlements for Investors? 

Attractive rates of return: When we say “a good investment is one that generates double-digit interest rates with no loss of principle,” we’re thinking about life settlements. While past returns are not indicative of future returns and there are always risks in investing, we have seen life settlement funds produce gains consistently, ranging from mid-single-digit annualized returns to low double digits.

Safety and Stability: Returns are not tied to the performance of the stock market, housing market, interest rates, politics, or any other external factor. The underlying policies are typically highly rated life insurance companies, known for stability.

A true “win-win” investment: Seniors that no longer want or need their permanent insurance policies can always surrender them in exchange for the cash value, but if they can sell the policy for more, they benefit. Seniors often receive as much as four times their cash surrender value. In other words, investors and the seniors who sell their policies both benefit.

Talk to a financial advisor to learn more about Life Settlement Investing

How Can I Invest in Life Settlements?

There are three basic ways that Life Settlement investments are bought and sold:

  1. Direct Purchases of Life Insurance policies. This requires a large outlay of cash, along with the expertise to buy the right policies. For those wishing to invest a million dollars or more, this can be an option. It may also be the most efficient in terms of costs, however, life settlements require expert analysis and are NOT a “do-it-yourself” project.
  2. Direct Fractional Life Settlements. With Direct Fractional life settlements, larger policies are divided up into smaller portions and sold individually to investors. Each investor owns a portion of the policy, or in many cases, several policies.
  3. A Life Settlement Private Equity Fund. In this option, the investor is purchasing a portion of a fund comprised of hundreds of policies. One advantage to this is diversification. If an investor purchases only one or two policies (or direct fractional portions of policies), their return will be less predictable than what a fund can deliver.

Are There Disadvantages to Investing in Life Settlements?

Yes, a major disadvantage is that they are simply not available to most investors. Life Settlements are highly regulated, and at this writing, direct or direct fractional policies can only be sold to accredited investors.

Accredited investors include individuals, banks, insurance companies, employee benefit plans, and trusts. For an individual to qualify, they must earn $200k per year ($300k joint income), or have a million dollars in net worth.

The availability of certain life settlement investments also varies state-to-state. As of this writing, direct fractional life settlements are not available in most states.

Funds must be committed for the duration of the investment. Another potential disadvantage is that money will typically be tied up in a life settlement investment for several years, such as 7, 8, even 10 years. Even with a life settlement fund, it is not like a mutual fund that people can buy and sell at will. Private equity funds have a start date and an end date, and it is possible but not simple or advantageous to pull your money out early.

Life settlements must be selected and managed correctly. While “do-it-yourself investors” can often do fairly well with something like peer-to-peer lending, life settlements are a sophisticated investment that requires expert selection, management, and oversight.

For instance, there must be funds to maintain the policies or they will be canceled. And it is essential that the policies were originally purchased and later sold legally, or losses will be incurred.

If Life Settlements Are So Great, Why Haven’t I Heard of Them?

Most financial advisors aren’t aware of true alternative investments. If they work for a brokerage firm, they typically have limited options as far as the types of investments they sell. Most advisors and brokers are not educated about nor allowed to sell outside of what their brokerage firm offers.

However, given the fact that Warren Buffett and Bill Gates have put billions into life settlement funds, if you’re an accredited investor, life settlements may just be worth looking into.

In other words, while life settlements are not for everyone, they are worth serious consideration if you are able to invest in them.

31 thoughts on “Life Settlements: Pros, Cons and Facts About Life Settlement Investments”

    1. Prosperity Thinkers

      Hi Gamilah,
      Thank you for reaching out, we’ve passed on your email address to one of our team members and they will reach out to you shortly.

  1. Hi, I’m from Trinidad and Tobago in the Caribbean. I’ll like to get more information on how do I go about Life investing in Settlement Private Equity Fund.

  2. Pingback: Live Long and Prosper: 5 Ways to Never Run Out of Money! |

  3. Several things — Make sure you look at that qualified investor stuff, many brokers kind of ask if you are qualified and are ready to sell you anything.
    Secondly, there’s a dirty little secret about this stuff — when people selling fractions of high value policies, remember, the insurance companies who sold those checked out the insured six ways to Sunday on their health. So — you are dealing with a doecial group of vetted, healthy people. Then, when they go to sell fractionally their policies, they are run through actuarial filters that may easily make them look like they are more likely to expire than the really are, skewing their expectancy and your ROI.
    Much better to have many pieces of many contracts than 1-5. Caveat emptor.

  4. How do you find out if the insured has died several years after selling you the policy? Especially if he no longer lives in the country?

    1. Hi Barry, we only deal with life settlements funds and the fund managers would keep track of such things. If you personally purchased a policy direct, you would definitely want to keep in touch!

    1. Hi Chuck, I apologize for the slow reply… Theresa will be following up if you haven’t heard from her yet… Kim is on vacation but returns next week. Thank-you!

  5. Kim had mentioned Life Settlements as a potential part of my retirement portfolio in addition to my Whole Life policies. How do I find out all about them? Is there a good, informative publication?

    1. Hi Philip, you can find more detailed information at http://prosperitythinkers.com/life-settlements. (That page is just for clients, but it sounds like you have spoken with Kim directly. Because most life settlements are for “accredited investors only” there is a lack of public information. For many years, they have been sold only to institutional investors such as pension funds.)

      Then I would contact Kim to get specific paperwork you can look over (no obligation), also to discuss which option might be a better fit. (We work with more than one private equity fund and there are differences in qualifications, taxation, etc.)

      Thanks Philip, and apologies that I did not see your comment earlier!

  6. David - Beaconlifefunds.com

    It is a good investment if you know how to manage the risk. Also be careful. There is no easy money. You need to work hard to get some. We can not predict a person lifespan now, can we?

    1. Thanks for your interest Raymond, I forwarded your request for information on to Kim, Kim or Jill will be in touch soon if not already.

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