What is a Life Settlement?
Life settlements are investments in life insurance policies that are sold to investors by the policy holder.
What is a Life Settlement Pool?
Life settlement pools are where the investment company bundles multiple policies together to reduce single policy risks as well as ensure a more predictable investment schedule. As an example, if you were to invest in a single policy there is a chance the policy may take much longer to pay off than expected. This can lead to a change in expected IRR of the investment. By bundling multiple policies into one investment your investment is spread over more policies along with other investors. In this way some policies will pay off sooner and some will take longer but the average will be more predictable. This method not only lowers the risk but also makes the investment schedule and payback period more predictable.
How does the investment work?
By investing in a pool you are able to put in as little as $25k. By combining this investment with other pool investors we can purchase multiple policies with different expected timeframes and returns. We blend these together in the investment pool by having policies that are expected to pay out in the short, medium and longer term. Our typical pool is a 4yr investment with the 5th year being used to dispose of policies that have not paid off yet. This ensures that your investment is returned to you by the end of the 5th year.
Each pool has a “Cap Call” every year that is used to pay for premiums on any policy that has not paid off. These calls are known a year in advance and may be smaller than expected if the policies in the pool pay off sooner than expected.
What is the investment schedule?
There are three parts to the investment schedule.
- Initial Investment
- Initial buy in to a pool with as little as $25k
- Yearly “Cap Calls”
- Yearly calls to pay premiums on policies that have not paid off yet. Typically 25% of the initial investment in year 1.
- Policy Payouts
- Every month that a policy in the pool pays off the investment will return that payout to the investors
- This return can be used to pay future “Cap Calls” or you can use it for other investments
- Typically this payout is what investors will refer to as a “Cash on Cash” return
- Policy Disposition
- In year 5 the investment pool will begin to sell policies that have not paid off to other investors in order to provide liquidity to the original pool investors.
How do I get my investment back?
Pools are run with a 4+1 design. In the first year the pool acquires policies. The number depends on the total pool size but typically is between 10 and 20 policies. In years 1 through 4 the pool will return cash from policy payouts. These payouts will be from the face value of the policy as well as any premiums that were in reserve from “Cap Calls”. In year 5 any policy that has not paid off will be sold to other investors to provide liquidity to the investor pool. Think of year 5 like selling of a real estate property to provide liquidity to the original investors.
What are the risk of a Life Settlement Investment?
As will all investments there are risks. Given the nature of the Life Settlement EVERY policy will eventually pay off. The risk is in what returns will be realized when the payoff occurs. We design the pools to provide a mid teens percentage IRR return. Some policies in the pool will pay more and some will pay less but the design is to provide the IRR over the pool lifetime of 5 years.
The technology behind the creation of pools is designed to accurately predict payout dates in order to meet the pool investment design. We are more than happy to dig into the supporting technology that helps us better predict payout timeframes. Contact us to have us answer any questions.
