When most people think about investments, their mind often goes to the stock market. However, there are other ways that investors can diversify their portfolios. Life settlement investments are widely available and can be highly lucrative. Life settlement investing can deliver strong returns at low risk.
The process of buying and selling life insurance policies is also fairly straightforward, especially when an experienced life settlement provider is involved. Learn more about life settlements, the pros and cons of investing in life settlements, and how to get started as a life settlement investor.
Life Settlements – A Brief Overview
A life settlement refers to the sale of a person’s life insurance policy to a third-party investment for a one-time lump-sum payment. The seller of the life insurance policy typically receives an amount that is less than the actual death benefit but more than the policy’s surrender value. Once the sale is completed, the investor becomes the new beneficiary on the policy and takes over all future premium payments. When the original policyholder dies, the buyer receives the death benefit.
There are many reasons why a person might decide to sell their life insurance policy. Some seniors may find that they no longer need the policy or are not able to continue paying the premiums. Others may require a large sum of money to pay down debt, make a large purchase, start a business or supplement their retirement savings. By receiving a cash payment for their life insurance policies, seniors can enjoy a large tax-free payout that they can use for any purpose they wish.
Pros of Life Settlement Investments
There are several reasons why an investor may want to invest in life settlements. Life settlements are designed to satisfy the liquidity needs of policyholders while delivering strong returns for investors, making them a win-win for both parties. Here is a closer look at some advantages that investors can enjoy when they invest in life settlements:
- High Rate of Return
A good investment is one that has no loss of principal but generates double-digit interest rates. This is exactly what investors experience when encountering life settlement investments. There are always some risks when it comes to investing but the risks of investing in life settlements are relatively small. According to an analysis published in the Journal of Risk and Insurance, the average return on a life settlement is 8 percent annually. This is considered a highly competitive yield for an alternative investment.
- Low Risk
Unlike many other types of investments, life settlements do not fluctuate in value based on factors like interest rates or market trends. Instead, investors can remain confident that they will receive the anticipated death benefit as long as they continue making the premium payments. Of course, investors will encounter a higher or lower profit margin based on the life expectancy of the insured. However, investors can mitigate this risk by offering more for an insured with a history of medical problems and less for a healthy insured.
- Greater Stability
Another major benefit of life settlement investments is greater safety and stability. The rate of return on life settlements is not based on the performance of the stock market, interest rates, housing market, politics or other outside factors. Instead, life insurance policies are generally backed by life insurance companies that are highly rated and known for their stability in the market.
Cons of Life Settlement Investments
While life settlement investments are considered to be a safe and profitable investment opportunity, there are a few downsides to consider before making a decision. These include the following:
- Highly Regulated
Life settlement arrangements are regulated at a state level, meaning the rules and regulations regarding these senior settlements differ from state to state. The contracting, disclosure and other requirements are generally placed on buyers, sellers and brokers. There are also some limitations when it comes to the availability of certain types of life settlement investments. For example, direct fractional life settlements are not yet available in most states in the U.S.
- Long-Term Commitment
Another possible disadvantage of life settlement investing is the longevity of these investments. Investors must commit to having their funds tied up in this arrangement for many months or years. There is no guarantee when the insured will pass and the death benefit will become available. In the meantime, investors must properly manage their life settlement investments and maintain the policies to prevent them from being canceled.
Speak with a Life Settlement Provider
Life insurance policies can be purchased and sold in several ways, such as through the direct purchase of life insurance policies, direct fractional life settlements or a life settlement private equity fund. To learn more about the pros and cons of life settlement investments or to speak with an experienced life settlement provider about your options, contact the professionals at Montage Financial Group today.
