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Life Settlements

What is a life settlement?
What are fractional life settlements?

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Warning: Some Life Settlement programs require the individual to be an accredited investor (definition: //en.wikipedia.org/wiki/Accredited_investor). If you are not an accredited investor, please stop reading immediately.

Life Settlement Return Rates as high as 10-20% with No Stock Market Risk?


No, this is not irrevocable trust asset protection. With the dramatic fluctuations that have occurred in the stock market, many investors cannot handle the volatility. Over the past few years, the market has fallen as much as 46% peak to trough. This is one of the reasons investors are looking for other ways to generate wealth with some stock market asset protection. This has resulted in the increased sales of fixed indexed annuities (especially the 7% guaranteed fixed indexed annuity). To make things even more unstable, economists have announced that we are very likely be doomed for the years ahead because of the insurmountable $1 trillion stimulus package that was passed by President Barak Obama and the democratic government which is accelerating our nation’s debt. (prayer: God help us and give Your wisdom to our leaders.) Only God knows what will happen in the stock market these days.

Asset Protection Using Life Settlements

People will ask is it even possible to use life settlements to avoid stock market risk? Is there really a way to generate wealth without having to invest in a volatile stock market or get sub 2% rates from CD’s? The answer is yes and it can be done with life settlements.

What are Life Settlements?

Life settlements are for accredited investors who can provide benefits for people who have a life insurance policy and no longer need it or cannot afford to keep it. By a policyholder selling their life insurance policy, individuals can receive the profits, which can be quite high depending on the value of the policy. It is possible for buyers to locate someone who has a policy and then offer the owner (i.e. the insured) cash for their life insurance. In addition, when a life insurance policy (i.e. life settlement) is bought, the buyer will be paid the death benefit if the original owner dies, and this amount will be tax-free even without an irrevocable trust. While this all sounds great, are there some risks associated with being a buyer of individual life insurance policies? Yes, should the original policy holder live longer than expected, the purchaser of the policy will be required to pay additional premiums resulting in a reduction of the overall rates of return – this is the risky part. The solution is fractional life settlements.

Fractional Life Settlements

This may sound like a confusing term, but fractional life settlements are pretty easy to understand. These settlements occur when there are multiple buyers of a life insurance policy. These individuals will combine their purchasing power to share the risks. This is done by buying a small portion of the life insurance policy instead of the entire thing. Doing so will drastically reduce risks, especially when the original policy owner does not die when they are expected to do so. An example would be if a client bought just $75,000 interest in a particular policy. We will say the life insurance policy has a total price of $1,500,000, so the client would only be purchasing 5%.
As mentioned, it would be extremely risky for one person to buy a complete life insurance policy. Should the insured individual die early it could turn out to be a great wealth building opportunity. However, if the original insured were to die later, there could be financial ramifications for the new owner of the policy and the rates of return drop significantly.
Since buying life settlements as an individual can be so risky, there are some companies that will help a potential buyer connect with others who are looking to buy policies, which would allow all parties to share the risks and only buy a portion of the policy – in other words, the fractional life settlement.

Retirement Planning and Statistics on Life Settlements

The life settlement industry is constantly growing. There are corporate buyers who are in the practice of purchasing millions, if not billions of dollars in death benefits. The reason for this is the returns are really spectacular and because there are so many people who no longer need their insurance and are looking to sell it for the highest amount possible.
It is believed that $135 billion in death benefits were sold in 2010 and in 2013; the total is expected to jump to $140 billion. By the time 2016 rolls around, this amount will reach $150 billion. When considering buying a life insurance policy (i.e. life settlement), it is important to ensure that proper underwriting is practiced. This will ensure that the owner of the policy will most likely die within a period of 2 to 7 years.

Examining Rates of Return of a Life Settlement

The table provided below will show the estimated rate of return of a life settlement. The scenario is someone who purchased a life settlement that included a $1.5 million death benefit. It is also based on the assumption that the life expectancy of the original life insurance policy owner is between 2 to 7 years.
Life Expectancy (of original life insurance)Purchased PriceDiscountYear 1Year 2YearYear 4
2-4$900,00058.0%86.2%31.8%18.3%10.6%
3-5$825,00053.0%111.5%40.7%22.6%15.4%
4-6$750,00048.0%141.0%50.6%29.4%19.5%
5-7$675,00043.0%176.2%63%34.9%24.0%
Year 5Year 6Year 7Year 8Year 9Year 10
9.7%6.2%4.0%3.0%2.4%1.6%
12.7%8.6%6.5%4.8%3.5%2.5%
15.9%10.2%8.7%6.8%5.3%4.1%
19.4%13.1%11.1%8.9%7.1%5.8%
Keep in mind that all insured individuals are underwritten medically. This is done to calculate the insured’s life expectancy. The bolded numbers will show the rate of return for the time frame in which the insured person is expected to pass. Returns could be anywhere between 34.8% to 12.1%.
The lowest rate of return that is possible is 1.6% if the life expectancy of the insured is between 2-4 years from now and the purchased price of the life settlement was $900,000. Even though this is the lowest, potential buyers of the life settlement should compare this to investments in the S&P 500 spider fund within the past 10 years which resulted in a dismal 1.41% rate of return from September 2001 to September 2011.

How to Fund Fractional Life Settlements?

As with most retirement planning, buyers can use any money that they have available that is not needed for daily living. In most cases, it only needs to be short term money, especially if the insured is expected to die within a few years. It may be a bit longer for where the insured has a longer life expectancy. Buying fractional life settlements is a sound investment and can help clients avoid the stock market ups and downs while offering great potential returns for retirement planning.

Should My Advisor Offer Fractional Life Settlements as an Investment Option?

Advisors should definitely mention this retirement planning option. Since so many people are leery of investing in an unpredictable stock market, this is a safer way to build wealth and get a level of asset protection from the stock market volatility. Fractional life settlements should be considered a point of asset allocation, especially when dealing with any long-term investments.
Read more about the Life Settlement Contract
Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement.
Category: Asset Protection, Insurance

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