On May 17, 5:57 pm, beliav...@[EMAIL PROTECTED]
wrote:
> Is it possible for an individual to invest say $100 K in life
> settlements or viaticals? How? Looking at some ads run enticing people
> to sell their life insurance policies, the rates of return for
> investors look high.
The main players in the life settlement industry will only sell
policies to institutions, not individuals (to minimize criminal
motivations, of course). You would likely need to find one such
institution to be able to invest in the industry. Some hedge funds
also invest in LS. For the record, I have never heard of the returns
being as high as you cite. Most institutions target 10-12% return.
The Smartmoney example is an extreme, if not unheard of, one. The
things that make a policy a good settlement candidate do not align
with the example.
1. Increasing premiums due to falling dividend crediting rates and the
inability to afford premiums as one ages are two key motivators for
those looking to sell a policy. "Assuming no further premium payments"
is a bad assumption to make.
2. A policy is a good settlement candidate if there is a large
variance between the death benefit and cash surrender value. If a $1M
policy has a $900k cash surrender value, there's no "wiggle room" to
negotiate the settlement. You need a sizable gap. How does one get
that? Well, they either a) have a recently issued policy or b) have
severely underfunded the policy. In either case the premium
requirements to maintain the policy are significant. Think of it as
trying to begin saving for retirement at age 75. It's just too late in
the game, to not have a substantial base.
3. The insured needs to have had a marked decline in health since
policy issuance. That's how life settlement companies make their
money. The insurance company prices a policy based on life expectancy.
But once the policy is issued, the insured's life expectancy can
change and there is nothing the insurance carrier can do about it. A
life settlement company, on the other hand, will re-underwrite the
insured and determine an accurate life expectancy. They then profit on
the spread between the two (the insurance company expects to collect
premiums for X years, but the settlement company expects to pay
premiums less than X years). So now we're not only looking for a newly
issued policy, but the insured has to have recently declined in health
too!
The very long story short is simply that I don't agree with
Smartmoney's ad. That's a pie in the sky example that is far from
realistic.
(note: institutions buy LS policies in blocks, so the law of averages
& large numbers takes care of the statistical outliers that Doug,
perhaps jokingly, mentioned).
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