The life settlement industry is getting a lot of welldeserved attention these days, but the focus has been one-sided. Everyone, it seems, is looking for agents and brokers who have clients with unwanted life insurance policies to sell. But let me ask two questions: How many of us have clients over the age of 65, in poor health, with multi-million dollar insurance policies they don't want to keep? Very few, right? But how many of us have clients of all ages with poorly performing investment portfolios – especially those clients nearing retirement age? We all do!
With all the focus directed toward the sale of insurance policies, we may have overlooked the biggest and most obvious: the opportunity for our clients to invest in life settlement policies, just like some large financial institutions have been doing for years.
Here's the secret – life settlements may be a golden parachute for your clients' golden years.
So, why have some large financial institutions quietly been purchasing life settlement policies? Because they obviously recognize the potential for a superior return on investment, with very little risk.
This is what first attracted these savvy institutional investors to life settlements, but they aren't happy to share the secret.
If institutions are jumping headlong into this market, then it's probably worthwhile for individual investors to consider this as an added safeguard for their own portfolios.
With the volatility of the stock market and recent international political instability, many portfolios have suffered a free fall, just at the point where the boomers are approaching retirement. Who isn't ready to explore a new asset class that can help safeguard their life savings?
This is the perfect time to research a more reliable investment vehicle that may offer needed peace of mind for those hoping that they have enough of a nest egg to sustain them. As agents and brokers, we owe it to our clients to investigate whether life settlements might be a key component to fill a void in their portfolios and we receive a nice commission for doing so.
So let's start with the benefits of a life settlement investment:
- Uncorrelated to stock, bond, commodities and real estate markets.
- (This is probably the greatest strength of this new asset class – no matter what happens in the economy, life settlement payouts are unaffected.)
- Not directly affected by interest rates, global economy, or political climate.
- (Not affected by foreign currencies, who's in the White House, or any terrorist threats.)
- Investment assets issued by some of America's largest and most financially stable companies.
- (Life settlement policies are backed by such financial giants as New York Life, Prudential and other highly rated insurers.)
- Provides true portfolio diversification.
- (Life settlements can offer balance and performance to any portfolio.)
Sounds good, doesn't it? But before you jump in, let's explore and evaluate the risks and rewards of the three most common methods of investing in life settlements: bonded life settlements, life settlement funds and direct fractional ownership of a life settlement policy.
Bonded life settlements
This form of investing in life settlements is an asset-backed security that has also been referred to as "death bonds." A bonding company issues a bond to the investor, payable at a specified future date, like any other bond. If the insured lives beyond the date of the bond, the bonding company pays the investor a predetermined amount at that time. A death bond is simply a negative name for the flip side of the coin called "life insurance." In practice, no insurance company has ever marketed a life insurance policy as a death bond, even though it only pays its benefit when the policy holder expires.
Pros:
Access – the client gains access to the Life settlement asset class. Fixed Maturity – the investor knows the maturity date of his investment.
Cons:
Company Risk – the investor is relying solely on the strength and longevity of the underwriting and bonding companies. Research has shown that the bonding companies involved have been predominantly offshore-chartered companies with no regulation or oversight in the U.S.
No Direct Ownership – The investor does not receive any direct ownership rights in the insurance policy. If the bonding company does not pay, the investor has no recourse with the life insurance company for repayment of their investment.
Limited Liquidity – This type of bond has very limited liquidity and would not be marketable in the U.S. bond market.
High Cost – The cost of a bond is substantial and significantly reduces the potential return on investment.
