| Should You Invest in Life Settlements? |
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| Written by Tiya Lim |
| Thursday, 14 July 2011 00:00 |
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Overview:Life settlements can be an option for individuals who are in need of liquidity, and they aren’t correlated to the overall performance of the economy in general. There are, however, several concerns when it comes to life settlements, such as the fact that they aren’t regulated and are facing legal uncertainty.
A life settlement is a transaction in which an insurance policy owner can access liquidity from his or her policy by selling it to a third party. The payment received is typically greater than the policy’s cash surrender value but less than the expected death benefit. For individuals who need cash and hold a life insurance policy that is no longer needed, a life settlement remains a practical option for liquidity. In fact, it was estimated in 2009 that approximately $7 billion of face amount in life insurance was sold in life settlement transactions.1
Once third-party investors purchase life insurance policies from their owners, they can either wait to collect the death benefits themselves or securitize the policies to sell to investors. As an investor, your investment helps pay for the premiums to keep the life insurance policy in force, and when the policyholder dies, your return is tied to the death benefit. Although it may seem unsettling to get paid when someone you don’t know dies, the transaction is legal.
There are, however, several concerns regarding these investments:
The biggest benefit to investing in life settlements is they aren’t correlated to stocks and bonds or the financial performance of the economy in general. The performance of life settlements depends solely on the death rate of the insured individuals.4
But the risks involved with investing in life settlements overshadow the benefits. Until the life settlement industry is regulated, individual investors are vulnerable to sales pitches and promises that cannot be enforced and they instead would be better served by building a broadly diversified portfolio that matches their ability, willingness and need to take risk.
1 Life Insurance Settlements: Regulatory Inconsistencies May Pose a Number of Challenges. U.S. Government Accountability Office, GAO-10-775, 2010.
2 Staff Report to the United States Securities and Exchange Commission. Life Settlements Task Force, July 22, 2010.
3 Ibid.
4 Sam Rosenfeld, Life Settlements: Signposts to a Principal Asset Class. Wharton Financial Institutions Center, Working Paper No. 09-20, 2009.
This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio, nor do indices represent results of actual trading. The articles and opinions in this publication are for general information only and are not intended to serve as specific financial, accounting or tax advice. Copyright © 2011, Buckingham Family of Financial Services. All rights reserved. This material may not be copied or distributed (electronically or otherwise) without the written consent of Buckingham Asset Management. The products or services described herein are available to US citizens and residents only and the information contained is intended for such persons only. No information contained herein is an offer to sell. Investors should read the prospectus of a security prior to making any investments. For a free consultation and to speak with one of our investment advisors, please call 866.545.8816 or submit our contact us form. Add this page to your favorite Social Bookmarking websites          |
| Last Updated on Wednesday, 13 July 2011 13:09 |