Life Settlements Asset Class

The life settlement asset class came into existence over 100 years ago, but had only been available to institutional and ultra high-net-worth investors. Now, as a result of recent legislation, it is now accessible to California residents who qualify. Now, with as little as $10,000, “Qualified” or “Accredited” investors can buy into this asset class via Fractional Life Settlements.

Life settlements have no correlation to stock or financial markets, oil prices, interest rates, or traditional investment classes therefore investing in life settlements can offer outstanding returns while minimizing risk.

“Smart money” investors including Wells Fargo, Merrill Lynch, and Warren Buffett’s Berkshire Hathaway have quietly placed billions of dollars into life settlements because they offer superior return potential with minimal volatility and no downside risk. Through Fractional Life Settlements, individuals can now share in the profitability and peace of mind that top investment firms have enjoyed for decades.

As investors continue to search for both safety and yield, many are discovering life settlements. Life settlements allow qualified investors to own fractional shares of life settlement assets, similar to buying shares of stock in a publicly-traded company.

Introduction to Life Settlements

A life settlement is the purchase of an existing life insurance policy, by a third-party investor, for more than the cash surrender value of the policy. Originally designed for institutional and corporate investors, the life settlement market is now available to qualified individuals.

Life settlements evolved in the United States during the late 1990s, and experts estimate the market to grow to between $100 and $160 billion over the next two decades. A significant number of policies are expected to come to market, supported by various trends including Baby Boomer population growth, financial uncertainty and favorable legislation.

Investor Returns

Empirical data continues to show how life settlements have averaged superior returns while keeping principal safe.

The AAP Life Settlement Index

The AAP Life Settlement Index tracks the performance of funds implementing an investment strategy in U.S. life insurance policies (“life settlements”) and serves as a transparent benchmark for the overall life settlement market. The Index allows investors to run performance comparisons and analysis of life settlements to other asset classes, such as stocks, bonds and hedge funds.

Performance Comparisons to Stocks, Bonds & Hedge Funds –

Dec 2006 – Mar 2010


As can be seen by the above chart, as of February 2009, “the S&P [fell] 53% from its October 2007 peak and had seen its worst six-month drop in percentage terms — 42.7% — since 1932, when it dropped 45.44% in the six months ending in June.”

– The Wall Street Journal, Brutal February for Blue Chips, March 1, 2009.

Like investors who lost fortunes during the Great Depression, investors who had all of their money in the S&P 500 would have lost nearly one-half of their principal in February 2009.

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. Perhaps this is why institutional investors have invested billions into life settlements.

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.

The Wharton School Study

The difference between life policy surrender values and fair market values is simply astounding. A 2002 study by the Wharton School at the University of Pennsylvania found that while the surrender value for policies in their sample amounted to a total of $93.4 million, the fair market value for these same policies was $336.3 million. This represents a staggering 360% difference between the cash surrender value and fair market value of the policy as a life settlement. This is one reason why this asset class has been so popular with “Smart Money” (institutional) investors.

The Coveted “Lapse Rate”

According to leading actuarial firm Milliman, Inc., approximately 90% of all life insurance policies are surrendered or lapse without payment of a claim. This is an astonishing rate and something life insurance carriers conceal from the public.

Suppose an individual has been paying annual premiums of $50,000 each year to keep their $2,000,000 life insurance policy in force. They’ve been paying these premiums for the past 5 years for a total of $250,000 paid to the insurance company, and have $75,000 of cash surrender value in the policy. Now suppose that they can no longer afford those premium payments.

What are their options? Most individuals, unaware of the life settlement option, will surrender the policy for $75,000. By exploring the open market, however, this same policy owner could conceivably receive 20% of the policy’s face amount, or $400,000. In this case, a policy owner surrendering their policy back to the insurance company would lose $325,000.

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. In today’s world, where many seniors have lost significant portions of their retirement assets and income, selling their policy for substantially more than its cash value can make a tremendous difference in their lives. As an investor in this asset class, you are in fact helping seniors maintain their quality of life.

Investment Safeguards

Independent Escrow & Banking Services

The life settlement company appoints a third party Trust to act as its escrow agent and trustee over the trust.  The life settlement company is responsible for providing direction to the third party Trust in the management and administration of investor accounts invested in.

The Process

Step One

The Subscription Escrow Account – The third party Trust, as the escrow agent, accepts the investor’s funds, which are held in escrow, until the investor selects their desired policy or policies. By placing funds into the Subscription Escrow Account, investors are subscribed on a “first come, first served” basis. The minimum investment is $10,000.

Step Two

Premium Reserve Account – Once the investor selects their policy or policies, the Trustee transfers their funds from the Subscription Escrow Account to secure their purchase and funds the Premium Reserve Account.

Step Three

The Trustee records and issues the beneficiary rights to the individual “Subscription Escrow Investors”.

Step Four

The investor receives a recorded confirmation of their beneficial interest from the third pary Trust on their selected policy or policies.

Step Five

The Trustee makes certain that all required premiums are paid from the Premium Reserve Account, which is held and controlled by their bank.

Step Six

Once the policy matures, the third party Trust will file the appropriate claim with the highly-rated insurance company. The investor, who owns the beneficial interest in the policy, will receive their proportional, pre-determined share of the policy proceeds.

Step Seven

Disbursement Option – investors can receive all or part of the maturity value as a cash payout, or

Re-Investment Option – investors can re-invest their maturity value by selecting from the current portfolio of policies

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Some or all of the proceeds of a Life Settlement may be taxable under federal or state income tax laws. Advice from a professional tax adviser is recommended. Receipt of proceeds may impact eligibility for government benefits and entitlements. Prior to sale, the insured should consider the continued need for coverage, impact to estate plans, availability of insurance, cost of comparable coverage or tax implications.