What is a Life Settlement?
Thousands of senior citizens are looking to sell their life insurance policies for cash. Many use the cash they receive to help pay for end of life and long term care costs. When they sell their life insurance policy to an investor or third party for cash this transaction is called a life settlement.
Example: Jane is 85 years old. She owns a $1,000,000 life insurance policy. She has developed chronic health problems, and now needs nursing care. Jane decides to sell her life insurance policy, instead of continuing to pay for it. She will then use the cash to pay for her long term care costs.
Why invest in Life Settlements?
For decades, only ultra-wealthy and institutional investors (Warren Buffett, big banks, investment companies, etc.) could afford to buy life settlements. However, in 2000 the state of California introduced Senate Bill 1837, allowing the average investor to purchase a fraction of a life settlement. Rather than one wealthy investor purchasing an entire insurance policy, now the average investor can own a small portion of that policy.
What makes life settlements so attractive to qualified investors is the diversification provided and the non-correlation to the stock market.
What’s My Return?
Your return can be calculated one of two ways: as an overall return, or as an annual rate of return (APR). Until a policy matures you cannot know your APR. This is why we prefer to show clients their estimated overall return. Before marketing a policy, we typically fix the overall return according to how many months the insured is expected to live.
Example:
An 80 year old male is expected to live 5 years - 60 months. We would show an estimated overall return of 60%. In this case, if an investor had $10,000 invested in this policy, they would receive $16,000* when the policy matures. Once the policy matures the investor can figure out exactly their annual rate of return (APR). The sooner the policy matures the higher the APR; the longer it takes to mature the lower the APR.
*Life expectancy estimates are not 100% accurate and there’s no guarantee the insured will pass away on an exact date. Investors must realize there is a possibility some or all of their policies could go past life expectancy, thus lowering their overall return.
Cash vs. IRA
One of the biggest decisions an investor makes is whether to fund an investment in life settlements with non-qualified funds (cash) or qualified funds (IRA/Roth IRA/401k/etc.).
Cash
Investors who want to use cash must make sure that those funds won't soon be needed. Life Settlements are an illiquid investment, meaning you can’t withdraw any funds until a policy matures. Usually, your money will be invested for several years. So, investors with cash need to only use funds they don’t foresee needing for some time.
Retirement Account
Retirement accounts are often especially well suited to Life Settlements because most people don’t plan on accessing these accounts for several years, fitting this investment's anticipated timeline. And, life settlement payouts within a retirement account will see no immediate tax implications, so funds are able to continue to grow tax deferred. Unlike many of our competitors, we will pay any IRA fees associated with this investment for two years per $25,000 invested.
The EquiLife Difference
Since 2000 several life settlement companies have been offering this product here in California. However, the way many of these companies structured their investment left their clients exposed to unnecessary risks and additional out of pocket costs.
The Old Way
Many of these companies would place your funds in one or multiple policies and put a portion of those funds into a “policy maintenance reserve account." This account would pay the premiums (cost of insurance) and other costs of the policy through the life expectancy of the insured. If the insured lived beyond that life expectancy then the reserve account would become depleted, meaning investors now had to immediately pay out of pocket for the premiums. If a case matured early, the life settlement company would pocket the remaining reserve funds as added profit to themselves.
The EquiLife Way
We have reduced the chance that you will pay out of pocket for a capital call. Investors purchase life settlements from EquiLife as a pool of policies; the investor owns a portion of each policy. A policy maintenance reserve account serves the entire pool. If a policy goes longer than expected, maintenance reserve funds protecting the remaining policies are used as a backup plan to pay that policy's additional costs, so the investor doesn’t come out of pocket for the capital call. When any policy matures "early," that policy's reserve funds remain in the account to help pay for future costs of the remaining policies in the pool. When the final policy in the pool matures, if there are funds left over in the reserve account, those funds are returned to the investor. Unlike other life settlement companies, we don’t pocket those funds - they belong to you!
*Capital calls can become necessary, and due to the fact that life expectancies cannot be guaranteed, returns may take longer than expected to be realized. Review the offering documents for details.
