Investment Risks in Life Settlement Funds Explained
Life settlement funds are notable alternative investments appealing to institutional investors. These funds comprise life insurance policies purchased from individuals who no longer wish to maintain them. The fund becomes the policies’ beneficiaries, takes over premium payments, and collects death benefits upon the insured’s death.
Despite their attractiveness, managing life settlement funds is complex and fraught with risks. These risks, if not properly handled, can significantly reduce returns. Below, we delve into the unique risks of life settlement funds.
Longevity Risk
The main risk in life settlement funds is the insured living longer than expected. Life Expectancy (LE) assessments predict how long an individual will live. If policyholders outlive these projections, funds will pay more in premiums than anticipated. Consequently, returns diminish, and in some cases, can become negative.
Legal and Regulatory Challenges
The life settlement industry faces heavy regulation across almost every state. Though regulations protect consumers, they also pose challenges for fund managers. These challenges include contractual issues in policy transactions, disputes with insurance carriers, and potential litigation. These legal and regulatory issues can be costly and disruptive.
Cost of Insurance (COI)
COI is a critical premium component covering projected mortality costs to the insurer. However, insurers have been raising COI charges unexpectedly. This trend aims to recoup revenues lost during prolonged low-interest rate periods. Such increases pose risks to funds holding these policies, impacting overall returns.
Liquidity Issues
Most life settlement funds are closed-end, making it difficult to exit investments before the end of the investment horizon. This constraint can be problematic for institutional investors needing flexibility to adjust asset allocations due to macroeconomic shifts or liquidity needs.
Opportunities in Life Settlement Funds
While risks are substantial, life settlement funds also offer unique opportunities.
Attractive Returns
Life settlement funds can yield robust returns. Research indicates average returns of 8%, with double-digit returns in some cases. Returns stem from the difference between policy purchase prices, paid premiums, and the maturity value of death benefits.
Non-Correlated Investments
Investments in life settlement funds do not correlate with capital or debt market fluctuations. This non-correlation provides diversification and helps mitigate portfolio volatility. Consequently, life settlement funds are valuable for achieving a more stable investment portfolio.
Long-Term Investment Horizon
Life settlement funds accommodate long-term investment horizons. This characteristic helps investors avoid the pitfalls of short-term investment trends. Furthermore, advancements in life expectancy predictions increase the likelihood of realizing anticipated returns over time.
Conclusion
Life settlement funds present both significant risks and substantial opportunities. They offer potential for high returns and can diversify portfolios. However, inherent risks require careful consideration and management.
Our team understands the intricacies of managing life settlement portfolios. We identify key risks and employ strategies to mitigate them. Moreover, we capitalize on the fund’s strengths to ensure optimal returns. Understanding these dynamics is crucial for anyone considering life settlement investments. We remain committed to transparency and client education, offering comprehensive insights for informed investment decisions.
