Saturday, 19 July 2014

Life Settlement Brokers Share High-Return Investments

Even though life insurance settlements have been around for more than 20 years, they have only recently received exposure to the general public. Now independent, qualified investors can see returns that had once been the bread-and-butter of investment banks and institutional funds. The rapid growth in the industry means that more opportunities can be expected over the next decade.

Basics of Life Settlement Transactions

The basic life settlement agreement involves five parties: the insurance company, the policy owner, the insured, the settlement broker and the investor. Here’s how the process works:

  1. The policy owner sells the contract ownership and beneficiary rights to a brokerage company.
  2. The broker sells shares of one or more policies to institutional and independent investors.
  3. The broker or the investor continues to pay life insurance premiums, depending on how the deal has been structured.
  4. The insured, who may also be the previous policy owner, passes away.
  5. The insurance company pays the face value to the broker as beneficiary.
  6. The life settlement broker pays investors based on their fractional beneficial interests in the policy.

Settlement deals are relatively easy to set up, but they require a long-term investment horizon. Life settlements typically reach maturity within 10 to 15 years, although the payoff may come much sooner or much later.

Benefits of Senior Settlement Investments

Life settlements, or senior settlements, offer substantial benefits for the right investor. These include:

Fixed Returns

Life insurance settlements supply a fixed payout based on the policy's face value. Because they carry higher risks than bonds or fixed income accounts, the anticipated annual rate of return is also higher. Investors often see capital growth rates of five to 10 percent after fees. If the investment reaches maturity sooner than expected, rates can top 18 percent or more.

Diversified Assets

Settlement agreements are particularly attractive because they operate independently of stock exchanges, interest rates and currency valuations. They provide an excellent opportunity to diversify a portfolio and still earn reasonable returns.

Limited Risks

Experienced life settlement brokers take steps to reduce or eliminate the most common investor risks. Some of the preventative actions taken in each area include:

  • Political whims: Life settlement agreements have been regulated in 90 percent of markets throughout the United States. The contracts typically fall under the purview of the state's securities board or banking division. Legislative protections have been passed in 42 states and Puerto Rico.
  • Insurer collapse: Brokers can choose to select only policies that have been backed by a financially stable, top-rated insurer.
  • Policy lapse: Proven underwriting standards ensure that premiums are paid for the life of the insured.
  • Longevity: Advanced actuarial models have improved the life settlement industry's ability to predict how long a person with certain characteristics will live. At the same time, this number can never be guaranteed.
  • Contestability: Before policies can be purchased, they must be in force for a minimum of two years. This waiting period staves off stranger-originated life insurance transactions, suicide clauses and material misrepresentation clauses. In addition, many brokers ask heirs to acknowledge the transaction and relinquish their rights to challenge after death.

Nearly $35 billion worth of life settlement contracts are still outstanding, and more are being written each day. For people who understand the basics of these transactions and are willing to assume the risks, the future upside can be substantial. A qualified life insurance settlement broker can sit down with potential investors and discuss the newest opportunities.