The best-kept secret

Access – the client gains access to the Life settlement asset class. Fixed Maturity – the investor knows the maturity date of his investment.

Cons:

Company Risk – the investor is relying solely on the strength and longevity of the underwriting and bonding companies. Research has shown that the bonding companies involved have been predominantly offshore-chartered companies with no regulation or oversight in the U.S.
No Direct Ownership – The investor does not receive any direct ownership rights in the insurance policy. If the bonding company does not pay, the investor has no recourse with the life insurance company for repayment of their investment.
Limited Liquidity – This type of bond has very limited liquidity and would not be marketable in the U.S. bond market.
High Cost – The cost of a bond is substantial and significantly reduces the potential return on investment.

Life settlement funds

A life settlement fund is a collection of life insurance policies purchased and pooled together into a single fund, similar to a mutual fund. The investor purchases shares in the fund and is paid a percentage of the fund’s return based on their percentage of ownership.

Pros:

Access – Investor gains access to the life settlement asset class. Diversification – Investor gains diversification within their investment portfolio.
Fixed Maturity – Investors in a closed-ended fund have a predetermined maturity.

Cons:

No Direct Ownership – The investor does not receive any direct ownership rights in the insurance policies. The investor has no recourse with the life insurance company for repayment of their investment should the fund perform poorly.
Limited Liquidity – Shares in a life settlement fund can’t easily be converted to cash.
High Cost – Management costs associated with a fund can be high and therefore diminish the return to the investor.
Pricing Risk – If the fund becomes distressed due to poor management or poor underwriting, the investor’s return is at risk.

Direct fractional ownership

Direct fractional ownership of a life settlement policy is the most secure method of investing. The client actually obtains ownership and beneficiary rights to a portion of the investment policy. By actually owning a portion of the policy, the client maintains individual control over their asset. Think of the similar concept of owning a condominium, but not the entire building. Clients can enter this market at a fraction of the cost that large institutions require to commit. This is discrete asset ownership with all of its privileges.

Pros:

Access – The client gains access to the life settlement asset class.
Affordability – The client gains all the benefits of this asset by owning a smaller portion.
Diversification – Investor gains true diversification within their investment portfolio through exposure to this new asset class.
Direct Ownership – Gives the client control and beneficiary rights to the insurance policy.
Low Cost – Direct ownership costs are lower than the other two methods of investing. All of the closing costs are paid by the policy seller.
Liquidity – An emerging secondary market for policy fractions gives the investor the potential for limited liquidity.
Projected Return – The yield on each policy fraction is known at the time of investing and double-digit returns have been the norm to individual investors.
Premium Escrows – Policy premiums are escrowed for the maximum life expectancy on each policy. This ensures that the policy cannot lapse during this time.

Cons:

Liquidity – Although some liquidity is gained through an emerging secondary market, the asset is still considered a buy-and-hold investment.
Variable Maturity – Since life expectancy cannot be medically determined with complete accuracy, variable maturities are a known factor with direct fractional ownership. Depending on a client’s goals, some may be averse to variable maturities.
Premium Calls – Investors are required to begin making fractional premium payments should the escrow account become depleted.

Key questions to ask when considering a life settlement investment:

1. How long has the investment company been in business? (If they are new to the business, beware! It can take years to develop accurate underwriting techniques.)
2. How transparent are their operations? Are they publicly traded so the investor can evaluate the strength of the company through public records? (If not publicly traded, how can you verify their claims?)
3. What is their policy underwriting experience and history? Can it be verified? (If the company is young, they may still be experimenting with underwriting techniques.)
4. What is their historical return on investment? How long has that ROI been achieved? (If you can’t see years of verified return data, again – beware! The new kid on the block is someone to avoid.)
5. If bonded, where is the bonding company located? Domestically or offshore? (If a bonding company is located offshore, watch out. They may not be around to pay off in a few years and they are not under U.S. jurisdiction.)
6. Is the bond rated by a U.S. company such as Moody’s? (Unrated bonds should always be avoided.)
7. What is the investor’s recourse if the bonding company refuses to pay, or is not around at the time of maturity? (There is no recourse in this situation. Let the buyer beware.)
8. In the case of life settlement Funds, who is managing the fund? What is their past experience and success? (Fund managers can inject huge costs and greatly diminish the fund’s performance.)
9. In the case of direct fractional ownership, who is managing the company? (Make sure you investigate the track record and management team of any company you recommend. Your safest choice is to go with a company that is publicly traded.)
10. Will there be enough supply of life insurance policies for sale in the future? (One thing for certain, as long as people keep buying life insurance policies, there will always be a portion who want to sell. With the maturation of the boomer generation, the supply should be plentiful for a long time.)

There are pros and cons to each method of investing in life settlement, just as there are in any other type of investment, but one thing is for sure: Life settlements are here to stay and we need to take advantage of all the benefits this investment opportunity has to offer. After an exhaustive twoyear investigation, we are confident the best life settlement vehicle to recommend to our clients is direct fractional ownership.

Everyone is looking for a superior return on investment in a vehicle with a high degree of safety, especially those in or near their retirement years. Now that institutional-style returns are available to the individual investor, we have a new stream of income to tap into through life settlement investments. Are your clients aware of this investment option? If so, it could mean a soft landing in their retirement years.

The DFO secret is out – make sure your clients have strapped on their golden parachute before they jump into retirement.