Life Insurance Investment Funds
Life settlement investment funds consist of a number of life insurance policies that have been purchased from life insurance policy owners. By pooling together a number of settled policies, the fund attempts to earn a risk-adjusted return for the investors in the fund. Each policy within the fund may generate a different rate of return, but the fund’s performance is measured by the collective returns of all policies within the fund.
In essence, a fund of life settlements provides diversity and reduces the risk of ownership compared to owning a single life settlement. While one investment within the fund might under perform expectations, another might do better than expected.
Unlike Annuities and Structured Settlements
Unlike an annuity, where an investor is guaranteed a specific rate of return, there are no guarantees on whether or not investing in a pool of life settlements will generate a specific return on investment. While you can limit risk and increase the probability of earning a solid return, it is possible for an investor to also lose some or all of their investment.
Life settlement funds can be an excellent way to diversify a portfolio of investments. There is a very low correlation with the returns that you may receive by investing in other asset classes. How the stock market performs may affect the price of gold, but has no effect on the performance of a life settlement fund.
Unlike a Fidelity growth fund, Vanguard Index fund, or any other mutual fund that is a common investment option for individuals, institutional investors are the prime buyers of life settlement investment funds. These funds are sold in the secondary market for insurance. Large institutions use these alternative investments to try to boost the performance of their portfolios and also to reduce overall investment risk.
A life settlement fund is only as good as the life settlements contained within the fund. It is up to the fund manager to accumulate the best possible portfolio of settled life insurance policies to reach the objective of the fund. There is always a trade-off between risk and reward in any type of investment and life settlements are no different.
If the fund pays too high a price to purchase life settlements or if the insured, who sold the policy, lives well beyond expectations, that can negatively affect the total return an investor would see on the life settlement fund. Therefore, one of the key components to running a successful fund is to make sure each life settlement that is purchased for the fund is properly valued.
A fund that contains policies where the average life expectancy of each insured is 3 years can provide a more certain rate of return (usually a lower percentage) than one that consists of policies where the average life expectancy for the insured is 7 years. It is also true that the potential rate of return on a fund with policies that have a longer life expectancy will be higher and carry a greater investment risk.
Life settlement investment funds may often outperform the stock market or other types of investments, but investors should be aware of the risks associated with such funds. Investing in this type of alternate asset class requires a great deal of due diligence. Perhaps that is the reason why this investment is more suitable for someone like Warren Buffet (Berkshire Hathaway) rather than Joe from Ohio?