Using Life Settlements as an Investment Class

 

English Alt Text: A four-panel comic shows a woman asking about life settlements. Panel 1: She asks, “What are life settlements?” Panel 2: A man explains they’re investments in life insurance policies bought from seniors. Panel 3: She asks how they work, and he replies that investors pay premiums and collect the death benefits. Panel 4: She concludes, “So returns are based on life expectancy.”

Using Life Settlements as an Investment Class

Life settlements — the purchase of life insurance policies from seniors who no longer need or want them — have evolved into a compelling alternative investment class for sophisticated investors.

Unlike stocks or bonds, life settlements are not correlated with market cycles, making them a powerful tool for diversification and yield enhancement in high-net-worth or institutional portfolios.

In this post, we’ll explore how life settlements work, who invests in them, and what to watch out for in this unique asset class.

πŸ“Œ Table of Contents

πŸ’‘ What Is a Life Settlement?

A life settlement occurs when a life insurance policyholder — usually age 65 or older — sells their policy to a third-party investor for more than the cash surrender value, but less than the death benefit.

The investor pays premiums and ultimately collects the full death benefit when the insured passes away.

This transforms a once-illiquid personal asset into an investment with measurable actuarial value.

πŸ—️ How Life Settlement Investing Works

Step-by-step process:

1. A senior sells their life insurance policy to a settlement provider

2. The provider aggregates policies into a portfolio and sells them to investors

3. Investors pay ongoing premiums

4. When the insured dies, the investor receives the death benefit

Portfolios are often diversified across age, health status, and policy sizes to manage mortality risk.

πŸ“ˆ Return Potential and Key Risks

Returns: 7–15% IRR depending on the policy pool, life expectancy accuracy, and premium financing structure

Risks include:

- Longevity risk (insured lives longer than expected)

- Premium payment risk (running out of funds)

- Regulatory or legal changes in life settlement law

But: They offer zero stock market correlation — ideal during volatile cycles.

🏦 Institutional vs. Retail Access

Institutional investors such as hedge funds, endowments, and pension managers are the main participants.

Retail investors may access through:

- Private placement life settlement funds

- Structured notes backed by life settlements

- Fractional policy platforms (in select states)

Accredited investor status is usually required.

⚖️ Regulatory Considerations

Life settlements are legal in most U.S. states and regulated under state insurance law.

Key laws include:

- Life Settlement Act (model legislation by NAIC)

- State-specific licensing for brokers and providers

Transparency and fair market pricing are key concerns — reputable providers offer actuarial reports and audits.

πŸ”— Further Resources

Explore more about alternative investment classes and mortality-based assets:

Important Keywords: life settlement investing, alternative investments, mortality-based assets, life insurance secondary market, hedge fund diversification