After years of having worked in the financial service sector working with major brokerages, truth be told, I was never introduced to an alternative asset class know as Life Settlements. It’s an alternative asset class that has been around for many years, but primarily utilized by major banks, insurance companies and industrial type portfolios. Warren Buffet, and his company, Berkshire Hathaway, have been participating in this asset class for many years to haul in double digit returns year in and year out without any ties to the stock market. So, how does all of this work and why haven’t you heard about it you might ask?
First, Life Settlements are normally large insurance contracts, ( usually, with a death benefit of $1,000,000 or more, typically $5,000,000. or $10,000,000), which have been offered for sale for a number of reasons. For example, perhaps, a married couple has one of the spouses insured for $5,000,000 with a whole life policy that has been in force for many years and has accumulated a nice cash value. Now, let’s also suppose that suddenly one of them is struck with a major health issue requiring very expensive medical treatment, and, far beyond the family financial resources. So, what are the options? First, they could just stop paying premiums on the policy and it will expire when the policy is no longer supported. Secondly, they could withdraw the cash value, which is normally only a small percentage of the amount of premium dollars contributed, or, the third alternative is to offer the policy for sale. This option normally yields four to five times more than the cash value which makes it good for the seller and the trust company that buys it. Trust companies typically are interested in purchasing these as part of their portfolio as, (1) They are normally highly rated policies which make the payout very predictable, and (2) The return on the amount contributed are usually quite good offering a fairly high return for the dollars contributed to buy the policy, using a narrow selection criteria. Historically, this asset class has had a historical rate of return of around 10 to 12% percent since 2001.
You might ask, why didn’t my broker, financial adviser or money manager ever tell me about this? The reason being, is because major brokerage firms are not interested in this asset class for a number of reason too numerous to list here, and, primarily because it only known by about 15% of the financial services sector. Since it’s an alternative asset class, it’s but a small segment of the financial service dollars here in the U.S. market. However, biggest reason is because historically it’s only been available to institutional type investors until recently when some trust companies have packaged these products to make them available to individual investors both for qualified accounts, (IRA’s, 401k’s) and non qualified accounts. Primarily positioned for accredited investors or high net worth individuals, make it beyond the reach of the average investor
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