What is a Life Settlement?
Thousands of senior citizens are looking to sell their life insurance policies for cash. Many use the cash they receive to help pay for end of life and long term care costs. When they sell their life insurance policy to an investor or third party for cash this transaction is called a life settlement.
Example: Jane is 85 years old. She owns a $1,000,000 life insurance policy. She has developed chronic health problems, and now needs nursing care. Jane decides to sell her life insurance policy, instead of continuing to pay for it. She will then use the cash to pay for her long term care costs.
Why invest into Life Settlements?
For decades, only ultra-wealthy and institutional investors (Warren Buffett, big banks, investment companies, etc.) could afford to buy life settlements. However, in 2000 the state of California introduced Senate Bill 1837, allowing the average investor to purchase a fraction of a life settlement. Rather than one wealthy investor purchasing an entire insurance policy, now the average investor can own a small portion of that policy.
What makes life settlements so attractive to qualified investors is the diversification provided and the non-correlation to the stock market.
What’s My Return?
Your return can be calculated one of two ways: as an overall return, or as an annual rate of return (APR). Until a policy matures you cannot know your APR. This is why we prefer to show clients their estimated overall return. Before marketing a policy, we typically fix the overall return according to how many months the insured is expected to live.
Example:
An 80 year old male is expected to live 5 years - 60 months. We would show an estimated overall return of 60%. In this case, if an investor had $10,000 invested in this policy, they would receive $16,000* when the policy matures. Once the policy matures the investor can figure out exactly their annual rate of return (APR). The sooner the policy matures the higher the APR; the longer it takes to mature the lower the APR.
*Life expectancy estimates are not 100% accurate and there’s no guarantee the insured will pass away on an exact date. Investors must realize there is a possibility some or all of their policies could go past life expectancy, thus lowering their overall return.
Cash vs. IRA
One of the biggest decisions an investor makes is whether to fund an investment in life settlements with non-qualified funds (cash) or qualified funds (IRA/Roth IRA/401k/etc.).
Cash
Investors who want to use cash must make sure that those funds won't soon be needed. Life Settlements are an illiquid investment, meaning you can’t withdraw any funds until a policy matures. Usually, your money will be invested for several years. So, investors with cash need to only use funds they don’t foresee needing for some time.
Retirement Account
Retirement accounts are often especially well suited to Life Settlements because most people don’t plan on accessing these accounts for several years, fitting this investment's anticipated timeline. And, life settlement payouts within a retirement account will see no immediate tax implications, so funds are able to continue to grow tax deferred. Unlike many of our competitors, we will pay any IRA fees associated with this investment for two years per $25,000 invested.
