What Are Life Settlements?
A life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit to a third party. A life settlement focuses on policies insuring older individuals, typically 65 or over, with life expectancies of at least two years. More about how they work in a minute.
ATTRACTIVE RATES OF RETURN: Investing in Life Settlements generate targeted double-digit returns with limited risk.
SAFETY AND STABILITY: Returns are not tied to the performance of the stock market, housing market, interest rates, politics or any other external factors.
A TRUE "WIN-WIN" INVESTMENT: Both consumers that don't want or need their insurance policies, and investors benefit from this unique asset class.
As can be seen by the chart, during the most recent economic crisis, life settlements performed well against other indices, including the
S&P 500 equity index, Credit Suisse’s Hedge Fund and U.S. Bonds. With no correlation to other markets,
life settlements can act as a defensive strategy to reduce the overall volatility of an investor’s portfolio.
*According to an 11-year study by The London School of Business, investors purchasing their sample of life settlements could have expected to earn an average cost-weighted internal rate of return of 12.5% per year. (article link)
Susan has COPD and emphysema and has a life expectancy of 47 months. She decides to sell her policy to an outside investor who pays her $624,000 for the policy. The investor becomes the new owner of the policy and is responsible for making the $38k annual premium payments. They also become the new beneficiary of the policy. When Susan passes away, they will receive the $1.1 million death benefit, they just don’t know when that will happen. If Susan passes away in 47 months, the investor would have paid four years of premiums for a total of $152,000, and would receive the $1.1 million death benefit as the beneficiary, representing a 10.27% internal rate of return.
If she were to pass away in three years, then the return would be 15.7%
If she were to pass away in 16 years, the return would be -.16%
Proper life expectancy valuation would indicate that 50% of the policies should pass away +/- 6 months of the projected life expectancy.
Planning for LE + 24 months adds another 35% probability to the maturity dates.
Premium Reserve Management (PRM): 3%-4.5% investment growth in the LE + 24 months fund adds another 10% - 12% to the maturity coverage
This leaves 3% - 5% of the policies uncovered—this is the “far right tail risk”
Premium Reserve Management (PRM) accounts can be established for the benefit of investors. A certain percentage of fund assets will be held in reserve to help pay for the 3%-5% of the life settlement policies that defy life expectancy projections. Once funded, the reserve account can only be used to pay for unforeseen premium payments.
For every maturity that happens prior to LE + 24 months, you will have unused funds in the Premium Reserve Management (PRM) account that would continue to grow and could be used to pay policy premiums that my go beyond Life Expectancy + 24 months.
This “buffer” account, plus expected investment growth of 3% to 4.5% of the PRM assets allows it to help reduce the 3% to 5% far right tail risk.
How Does It Work?
There are three main parties that are involved in a life settlement transaction--the insured, the investor, and the insurance company. Here’s how it works:
Susan is an 83 year old female who has a $1.1 million universal life insurance policy from AXA Life Insurance that she no longer wants, and can no longer afford. She has been paying into this policy for years, and just got notice that her premium costs will increase to over $38,000/year. She has no cash value in the policy, and it is in danger of lapsing. What are her choices?
She could not make the next premium payment and let her insurance coverage expire worthless, or she could sell her policy in the open market to an investor via a life settlement transaction.
This example highlights the risk and reward of life settlement investments. Susan’s emphysema and COPD indicate a projected life expectancy of 47 months, so your expected rate of return is 10.2% over that 4 year holding period. However, if Susan exceeds life expectancy, and lives for another 16 years to age 96 (doubtful, but it could happen) then your rate of return would be a -.16% return. We don’t know what Susan’s longevity will be. We can estimate, and before we purchase the policy we’ll make sure to look at Susan’s latest medical reports and have the information verified by a physician, but we would never be 100%.
However, with proper diversification we can purchase multiple life insurance policies that are similar to Susan’s and create a risk adjusted standardized bell curve:
RISK PROFILE FOR LIFE SETTLEMENT LIFE EXPECTANCIES
Do you have an unneeded or unwanted policy? Don't surrender it. Ask us about your options.
According to Milliman, Inc., approximately 90% of all life insurance policies are surrendered or lapse without payment of a claim.
Over the last decade, life settlements have permitted seniors to sell their unneeded or unwanted policies at significantly better market values than they would have received by simply surrendering the policy.
As an investor in this asset class, you are in fact helping seniors maintain their quality of life.
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Disclaimer: Life Settlement investments are available through Anthony Capital Alternative Investments, under Regulation D 506(C) private placement offering and are for accredited investors only. The performance of any case studies represented on this site are historical, and past performance is not a reliable indicator of future results. As a result, investors may not recover the full amount invested, and the value of shares can greatly fluctuate and are not guaranteed.
Investing in Life Settlements does contain risk. Please request the private placement memorandum.
Life Settlement investments are offered only to accredited investors. There are risks, including longevity risk whereby additional premiums may need to be paid by investors if mortality exceeds life expectancy which could reduce your rate of return. Life Settlement investments are offered by Anthony Capital Alternative Investments, LLC, via private placement offering under Regulation D, Rule 506 (C).
For a complete list of all of the risks, please review Risk Factors in the private placement memorandum of ANTHONY CAPITAL ALTERNATIVE INVESTMENTS INCOME ONE FUND L.P. (Link to the PPM)
Anthony Capital Income I portfolio is offered by Anthony Capital, LLC, a registered investment advisor. Case study return examples are for educational purposes only. Past performance does not indicate future results. Investing in bonds involves risks, including the loss of principal.
*This 12.5% return example is not in any way representative of a guaranteed return.