It is said that there are two certainties in life – everyone pays taxes, and everyone dies. While no one likes to think about their own demise, many have concerns about providing financially for loved ones.
The intent of life insurance has generally been to cover final expenses and provide money to survivors. But when life or family circumstances change, senior individuals may:
- Find it difficult to pay their life insurance premiums
- Need additional money for living or medical expenses as they age
- No longer need as much life insurance and want to recoup some of their premium expenses
This is where the concept of a life settlement might become an option for some policyholders. And this provides an opportunity for investors to profit.
Life Settlement as an Investment Vehicle
Simply put, a life settlement transaction is when the owner of a permanent life insurance policy sells his or her policy for a lump sum payment to an investor. The investor pays the policyholder an amount that is less than the policy’s death benefit, but more than the policy’s cash value. When determining the dollar amount offered, the investor considers the insured’s life expectancy, including their age and health status and the policy’s terms and conditions. This valuation can also be determined by a third-party.
The investor takes over the payment of insurance premiums when they take over the policy. After the death of the insured, the investor will receive the death benefit from the insurance policy and realize their profit on their investment.
6 Reasons to Invest in a Life Settlement
Institutional investors have been the primary purchasers of life settlements for years. However, individual investors can now also profit from this alternative investment option. Here are six reasons why you should consider investing in life settlements:
1. Lower risk of loss
Life insurance is a regulated industry with less volatility than many other investment vehicles that allows you the ability to diversify your portfolio. A life settlement is an asset that provides investors with a known future cash flow.
2. More accurate data
As the amount of available data increases, life expectancy underwriters can determine life expectancies more accurately. This allows for improved mortality projections, due diligence and better executed buying decisions. Investors generally realize their profits within eight to 10 years.
3. Rate of return is not affected by market swings
Returns from life settlements are not connected to the performance of housing or stock markets, interest rates, political climate or other macroeconomic factors. Adding life settlements to your portfolio allows you to better balance your risk with investments that carry a higher risk.
4. Attractive returns
Because life insurance policies have a limited liquidity, they carry a very low underlying credit risk. Investments with lower risk do not always carry the best returns. But the rate of returns for life settlements tend to be in very high single digits or low double digits.
5. Benefits both investors and insureds
Life settlements give seniors the ability to sell their permanent life insurance policies for more than they would receive when surrendering them for cash value. Entering into a life settlement allows retirees cash funds for medical expenses or whatever they need money for, including travel or purchasing a vacation home.
6. Potential for growth
As more baby boomers are reaching retirement age, the market for life settlement investing will continue to expand. The retirement population increases by 10,000 new retirees every day. Coupled with increased life spans, the potential for older adults to contract chronic diseases related to aging, including cancer, heart disease, diabetes and Alzheimer’s disease is significantly increasing. With increased health care costs, more Baby Boomers may face financial difficulties.
If you are ready to invest in life settlements or would like to learn more about how you could benefit from this investment option, The McGriff Alliance is ready to help. Contact us today for more information.