Life Settlement Investments

Life Settlement Investments for qualified investors can provide capital appreciation and portfolio stability. The following Life Settlement investments article by Curtis Cole summarizes the key points for financial advisors looking into this alternative for their clients.

Recouping Retirement

American ingenuity is one of the many forces behind invention. Fueled by freedom, independent thought and a tolerance for risk, American innovations—from the hard hat to the production line to WD-40 (water displacement perfected on the 40^th try) to the touch screen—have provided solutions to problems, both simple and complex. Today, one of those innovations is helping advisors meet the challenges of the global economic crisis. This new innovation is a life settlement investment which is the purchase by an investor of an existing unwanted or unneeded life insurance policy. Life settlement investments provide a unique alternative for advisors to explore in these uncertain times.

Life settlements, offered by advisors, can:

• Provide opportunities for capital appreciation. Business Week reported that life settlements should return on average about 8 percent per year;
• Improve portfolio stability because life settlements have no correlation to stock or bond markets; and
• Create liquidity by providing a market for superfluous or unaffordable life insurance policies.

Providing opportunities for capital appreciation

Life settlements, policies that have been sold into the secondary market, are like zero coupon bonds. They are purchased at a discount to face value. When the investment matures, the investor receives the full face value. The difference between the purchase price (plus any premium payments that must be made to keep the policy in force) and the amount paid on the policy when the insured passes away, is the total return earned on the investment. Individual life settlements may be bundled together in portfolios, much as individual stocks or bonds are bundled into mutual funds and other packaged products, which limits the effect of any single policy on overall performance. Any appreciation realized by investing in life settlement products may be taxed as ordinary income. Taxation of life settlement investments should always be determined by consulting a tax professional.

Improving portfolio stability

Many investors and advisors were disappointed by portfolio performance during 2008 because, in many cases, the asset allocation strategies employed did not provide significant downside protection. Life settlement investments can improve portfolio stability because their performance is not affected by stock or bond markets, business cycles, economic strength or political events. The value of a life settlement policy is determined by the price paid for the contract, plus any premium payments and the life span of the insured. When a life settlement is added to a portfolio of stocks and bonds, it can help reduce volatility and improve potential returns over time. According to Business Week, “…Uncorrelated assets like [life settlements] are highly prized in an increasingly connected global financial system.”

Creating liquidity

During 2005, almost 20 million life insurance policies, worth about $1.1 trillion dollars in total face value, were allowed to lapse, according to the Insurance Information Institute. This happened because relatively few Americans realized that there was a secondary market for unwanted life insurance policies. That is beginning to change. Today, individuals who need supplemental income, but are reluctant to sell investments at a loss, can instead sell unnecessary or unaffordable life insurance policies. Sellers of life policies receive lump sum payments that are greater than the amount they would receive by surrendering the policy to the insurer. The proceeds from a sale can be used to generate income for investment purposes, according to the needs of the individual. Sale proceeds are taxable; however, a portion may be considered capital gains and receive more favorable tax treatment, according to a recent IRS revenue ruling. Advisors should always consult a tax professional to determine how the proceeds from any sale will be taxed.

A solution that can help advisors and their clients meet the challenges of our times Life settlements are an innovative alternative in a time of great financial difficulty. They offer policy holders opportunities to create liquidity without selling investments at a loss They also offer investors the opportunity to realize capital appreciation over time and diversify their portfolios by adding an asset that has no correlation to traditional investments, like stocks and bonds.

Author Bio

Curtis Cole is the president of Dallas-based New Asset Alternatives, LLC, an alternative investment wholesaler. Advisors interesting in learning more about how life settlement investments could benefit qualified investors should contact
Curtis Cole
ccole@newassetalternatives.com
877-319-3999 or visit www.newassetalternatives.com.

New Asset Alternatives is a DBA of Evolve Securities, Inc. Securities offered through Evolve Securities, member FINRA/NFA/SIPC.