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August 01, 2009 at 08:00 PM
Even the most diversified portfolios were devastated as the S&P shed 38 percent toward the end of 2008. The first part of 2009 is proving to be an encore performance.
With the retirees of America looking for solutions to their portfolio woes, a shining light is rising in the world of “safe” financial options–life settlements.
Transferable insurance policies (“TIPs”), also known as life settlements, can be used as a fixed “piece” of a properly allocated portfolio, along with fixed indexed annuities. One can then structure the equities portion of the allocation through a professional money manager. For those accredited investors who do not want any stock market exposure at all, an appropriate blend of TIPs and FIAs is recommended.
Here are two proven strategies that have been successful in helping clients see the value in life settlements:
Case Study # 1
This particular client had $1.2 million remaining after the 2008 stock market losses ravaged his portfolio. He was looking for guaranteed income of $60,000 per year, while preserving his principal with moderate growth.
The strategy meeting began with the discussion of proper asset allocation and the rule of 100. Given the fact that he was 66 years of age and his wife was 64, an average age of 65 was used in preliminary asset allocation, and a risk profile was completed confirming the allocation of 65/35.
The conversation about the fixed portion (65 percent) of their allocation included four options: certificates of deposit, bonds, annuities and life settlements. The advantages and disadvantages of each were discussed thoroughly.
As the life settlements option was considered, the client was presented with a brief history of the strategy. We told the story of an existing 78-year-old client who had a life insurance policy for 15 years and no longer needed the $1 million death benefit, or the high premiums that accompanied it.
After the presentation, the following question was posed to the client: “What would happen to all of the premiums paid into the policy, approximately $168,000, if it was to lapse?”
“The client would receive the cash value,” he responded. This was correct, the client would receive $73,000 of cash value if in the policy was cashed in. The alternative option would be to sell the policy and receive $200,000. The advantage of selling the policy to the life settlement company was apparent.
