Published in the December 13 – 26, 2017 issue of Gilroy Life

Every investment bears calculated risk. Hedging risk and protecting assets becomes more important as a person enters the conservation and distribution phases of retirement. Life settlements, the life insurance-based investment, have been growing in popularity for corporate and sophisticated investors.

Life settlements are not for everyone but there are certain situations where a financial vehicle like this makes sense to explore given a person’s goals for retirement, asset protection, and portfolio growth. In a life settlement transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The payment amount is generally less than the death benefit and greater than the present cash surrender value. The investor then maintains the policy paying the premium necessary to keep the policy active with the expectation of collecting the death benefit when the insured passes.

Below are some answers to frequent questions one should address when considering a life settlement:

Why would a person want to sell a life insurance policy?

  • Premiums are too costly and no longer affordable
  • Cash may be needed for long-term care, health care costs, or college.
  • The purpose for insurance is no longer present; i.e. you have no debt, estate tax laws change, and/or the insured has no heirs they wish to leave assets to.

What are the advantages?

  • Attractive rates of return (often double digit)
  • Safety and Stability — Death and taxes are certainties; market returns are not.
  • A “Win-Win” Investment — Sellers and Investors can both benefit.

What are the disadvantages?

  • Settlements are not available to all investors. This market is highly regulated and suitability requirements must be met.
  • Availability varies from state to state.
  • Funds are committed to the duration of the investment. Often, funds are tied up for seven to 10 years.
  • Settlements must be selected and managed correctly.

Most financial advisors aren’t as familiar with this type of investment because brokerage firms often limit access to types of investments sold and advisors are restricted from selling outside of what the firm offers.