Investing in life insurance policies involves acquiring policies from the original holders. These sellers no longer need or want the policies. Purchasers often include large institutions such as banks, pension plans, and hedge funds. Wealthy individuals may also find life settlements suitable for their portfolios.
However, life settlements are not your typical investment. Unlike stocks or mutual funds, life settlements carry unique risks. These risks make them an inappropriate choice for many small investors.
One significant risk to consider is the rate of return. Investors see returns only when the insured individual passes away. The actual return remains unknown at the time of investment. If the insured lives longer than expected, the return diminishes.
Additionally, investors may need to pay more than their initial investment. The payout from a life settlement comes from the death benefit. This benefit is received after the insured’s death, but premiums must be maintained. If funds dry up, investors must pay to keep the policy active.
Another concern is the potential for the insurance company to suspect fraud. Claims can be denied if there is suspicion of false statements or fraud in the policy application. This could mean losses for the investor.
Life settlements are also not liquid investments. Selling the investment can be challenging if an emergency arises. Investors might have to wait longer than anticipated for returns, as payouts occur only after the insured’s death.
The possibility of the insurance company going out of business presents another risk. State guarantee funds do offer protection, but coverage might not be complete. As a result, some investments could be lost.
The North American Securities Administrators Association Inc. (NASAA) underscores that only accredited investors should purchase life settlements. This restriction aims to shield less sophisticated investors from the inherent risks.
An accredited investor can be several entities or individuals, including banks, insurance companies, and registered investment companies. It also includes individuals with a net worth exceeding $1 million, excluding their primary residence. Furthermore, individuals with an annual income over $200,000 for the past two years (or $300,000 with a spouse) qualify as accredited investors.
So, should you invest in life settlements? If you qualify as an accredited investor, it’s essential to consult a knowledgeable advisor. An experienced advisor can help you navigate risks and benefits specific to life settlements.
Understanding the risks of life settlements can aid in lowering overall portfolio risk and potentially harness a better return rate. Yet, these investments are not without their challenges. Comprehensive due diligence is paramount to make well-informed decisions.
We strive to provide our clients with the knowledge necessary to make sound financial decisions. Our services include offering access to life settlement opportunities. These investments can offer significant returns when appropriately managed. By maintaining transparency and rigorous analysis, we seek to empower our clients through informed decision-making. Whether you are considering selling a policy or investing, we are here to guide you every step of the way.
