Life Settlements
Individual Investing is the Industry’s Best Kept Secret
by Curtis Cole

The life settlement industry is getting a lot of well-deserved attention these days, but the focus has been one-sided. Everyone seems to be looking for unwanted life insurance policies to sell. But let me ask you two questions: How many of us have clients over 65 who are in poor health with multi-million dollar insurance policies that 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!

We may have overlooked the biggest and most obvious 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. Some large financial institutions have been quietly purchasing life settlement policies because they recognize the potential for a superior return on investment with very little risk. But they aren’t happy to share their secrets.

If institutions are jumping headlong into this market, it’s probably worthwhile for individual investors to consider it as an added safeguard for their own portfolios. Just when the Baby Boomers are approaching retirement, many portfolios are suffering a free fall due to the volatility of the stock market and recent international political instability. 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 peace of mind for those hoping to have a nest egg that’s big enough to sustain their golden years. As agents and brokers, we owe it to our clients to investigate whether life settlements could fill a void in their portfolios.

Life settlement investments offer us a unique new asset for our client’s portfolio and we receive a nice commission. So let’s start with the benefits of a life settlement investment:
• It is not correlated to stock, bond, commodities, and real estate markets, which is probably the greatest strength of this new asset class. Life settlement payouts are not affected by what happens in the economy.
• It is not directly affected by interest rates, global economy, or the political climate.
• It is not affected by foreign currencies, who is in the White House, or terrorist threats.
• Investment assets are 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.
• It provides true portfolio diversification.
• Life settlements can offer balance and performance to any portfolio.
It sounds good, doesn’t it? Before you jump in, let’s 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, which has been called a “death bond.” A bonding company issues a bond to the investor, which is 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 life insurance. No insurance company has ever marketed a life insurance policy as a death bond even though it only pays its benefit when the policyholder dies.

The Pros

• The client gains access to the life settlement asset class. With a fixed maturity, the investor knows the maturity date of the investment.

The Cons

• The investor relies on the strength and longevity of the underwriting and bonding companies. However, bonding companies have been predominantly offshore-chartered companies with no oversight in the U.S.
• The investor does not have direct ownership rights in the insurance policy. The investor has no recourse with the life insurance company for repayment of their investment if the bonding company does not pay.
• This type of bond, which has very limited liquidity, would not be marketable in the U.S. bond market.
• The substantial cost of a bond significantly reduces the potential return on investment.

Life Settlement Funds

A life settlement fund is a collection of life insurance policies purchased and pooled into a single fund, similar to a mutual fund. The investor who purchases shares in the fund gets a percentage of the fund’s return based on their percentage of ownership.

Pros:

• The investor gains access to the life settlement asset class.
• The investor’s portfolio gains diversification.
• Investors in a closed-ended fund have a predetermined maturity.

Cons:

• The investor does not have any direct ownership rights in the insurance policies. If the fund performs poorly, the investor has no recourse with the life insurance company for repayment of their investment.
• Shares in a life settlement fund cannot be converted easily into cash.
• There may be high management costs associated with a fund, which diminishes the return to the investor.
• The investor’s return is at risk if the fund becomes distressed due to poor management or poor underwriting.

Direct Fractional Ownership DFO

Direct fractional ownership of a life settlement policy is the most secure method of investing, in our opinion. The client actually gains ownership and beneficiary rights to a portion of the investment policy. The client maintains control over the asset by owning a portion of the policy. Think of the similar concept of owning a condominium, but not the entire building. Our clients can enter this market at a fraction of the cost that large institutions are required to commit. This is discrete asset ownership with all of its privileges.

Pros:

• The client gains access to the life settlement asset class.
• The client gains all the benefits of this asset by owning a smaller portion.
• The investor’s portfolio becomes truly diversified through exposure to this new asset class.
• It gives the client control and beneficiary rights to the insurance policy.
• Direct ownership costs are lower than with the other two methods of investing.
• The policy seller pays all closing costs.
• An emerging secondary market for policy fractions gives the investor the potential for limited liquidity.
• The yield on each policy fraction is known at the time of investing. Double-digit returns have been the norm to individual investors.
• Policy premiums are escrowed for the maximum life expectancy on each policy. This ensures that the policy cannot lapse during this time.

Cons:

• Although some liquidity is gained through an emerging secondary market, the asset is still considered a buy-and-hold investment.
• Since life expectancy cannot be medically determined with complete accuracy, variable maturities are a known factor with direct fractional ownership. Some clients may be averse to variable maturities depending on their goals.
• Investors must begin making fractional premium payments if the escrow account becomes depleted.
Here are some key questions for you to ask when considering a life settlement investment:
1. How long has the investment company been in business? Beware if it is new to the business. It can take years to de-velop accurate underwriting techniques.
2. How transparent are its operations? If it’s publicly traded, the investor can evaluate the strength of the company through public records. If it’s not, how can you verify the company’s claims?
3. What is the company’s policy underwriting experience and history? Can it be verified? A young company may still be experimenting with underwriting techniques.
4. What is the company’s historical return on investment? How long has that return on investment been achieved? Beware if you can’t see years of verified return data. The new kid on the block is someone to avoid.
5. If bonded, is the bonding company located domestically or offshore? Beware of an offshore bonding company. It may not be around to pay off in a few years and is not under U.S. jurisdiction.
6. Is the bond rated by a U.S. company such as Moody’s? Always avoid unrated bonds.
7. What recourse does the investor have if the bonding company refuses to pay or is not around at the time of maturity? There is no recourse in this situation. Let the buyer beware.
8. In the case of life settlement funds, who manages the fund? What is their experience and success rate? Fund managers can inject huge costs and greatly diminish the fund’s performance.
9. In the case of direct fractional ownership, who is managing the company? Investigate the track record and management team of any company you recommend. Your safest choice is to go with a company that is publicly traded.
10. Will there be enough supply of life insurance policies for sale in the future?

One thing is certain, as long as people keep buying life insurance policies, a portion of policyholders will want to sell. With the maturation of the Baby Boomer generation, the supply should be plentiful for a long time.

There are pros and cons to each method of investing in life settlements, just as in any other type of investment. But one thing is for sure, life settlements are here to stay and we need to take advantage of all the benefits of this investment opportunity. After an exhaustive two-year investigation, we are confident that direct fractional ownership is the best life settlement vehicle to recommend to our clients. Everyone is looking for a superior return on investment in a vehicle with a high degree of safety, especially those in or near their retirement years.

Now that institutional-style returns are available to the individual investor, we have a new stream of income to tap into through life settlement investments. Are your clients aware of this investment option? It could mean a soft landing in their retirement years. The direct fractional ownership secret is out, so make sure that your clients have strapped on their golden life settlement parachute before they jump into retirement.
––––––––––
Curtis Cole is the president of New Asset Advisors, LLC in Dallas. He is an expert in the field of life settlement investments. curtis@new-asset.com, 972-733-3763, www.newassetadvisors.com.