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Investment Portfolio Stabilization and Diversification - LifeXcel

Life Settlements are valuable alternative financial assets traditionally held by many institutional investors in their investment portfolios.

The question thus arises is why life settlements are attractive to institutions and whether “mainstream investors” should look into them too.

Before we dive in, it would be prudent to formulate basic principles of the performance measurements relative to market volatility.  As we all know and many have experienced it firsthand, investment vehicles such as stocks, bonds, commodities, futures, real estate, etc. can be extremely volatile, as these instruments are directly correlated to the internal condition and overall performance of the issuer. In addition, the external factors such as economy, geopolitical environment, natural disasters, political strife, inflation, public health crisis etc. have a strong influence on the upward or downward trajectory of traditional financial markets.

COVID-19, “Wall Street” and Life Settlements

COVID 19 is an ongoing pandemic that has affected and continues to shapeshift the global economy, developing the “new normal” way of living. Though financial markets are currently regaining their positions, earlier this year in March, it was reported that US Dow Jones Industrial Average and London’s FTSE 100 saw their biggest quarterly drops since 1987, dropping 23% and 25% respectively.

At the same time, the stock market Asia specifically in Japan plunged more than 20% from its highest position in December 2019. Due to this global health crisis many investors may have incurred huge losses due to panic, with some experts stating that the COVID- 19 recession is the worst global economic crisis since the Great Depression.

Furthermore, with numerous medical research it is a known fact that older adults are subject to a higher risk of severe illness from the coronavirus disease. In some cases, seniors were in possession of limited savings and were unable to cover medical expenses. As an alternative to lapsing or surrendering their policy, seniors have been increasingly steering towards selling their no longer needed insurance policy in the life insurance secondary market to get instant cash relief.

As more senior insureds discover their asset’s true value, life settlement industry experience a steady growth in the number of transactions appearing both in the secondary and tertiary market each year. For life settlement buyers, this increase appears to benefit in a broad way, i.e. investors will have a larger number of available to purchase polices to select from, fair market trading prices, increased transparency in transactions for all participants, etc.

Hence, during times of financial market volatility, which we have witnessed during the on-going COVID-19 pandemic, investing in life settlements can help to diversify and stabilize one’s investment portfolio.

A Non-Correlated Asset Class

Life settlement’s performance is known to be largely immune to the financial market volatility. This means they have no direct correlation to traditional investments assets such as stocks, bonds, real estate, oil prices, fluctuating interest rates etc. It can be stated that life settlement contracts are unaffected when these financial markets are volatile and experience downfall.

This is one of the major reasons why major institutional investors for many years have been steadily gravitating towards this asset class as an alternative investment option  to enhance their portfolio diversification.  For instance, in the event of the 2000 to 2004 dot com crash aka bubble burst – rapid rise of U.S technology stock equity valuations due to investment in internet-based companies- institutional investors were attracted towards life settlements due to marketing initiatives and increasing awareness of the asset’s benefits.

Economic crises have no direct impact on life settlements, as returns are entirely dependent on mortality. Thus, one of the major benefits of having life settlements in investment portfolio is its immunity to the financial market volatility and its ability to enhance such portfolio’s overall stabilization level.

A Tool for Diversification

A life settlement contract can offer an additional level of diversification to an investor’s portfolio and potentially enhance its performance and reduce exposure of market risk.

Theoretically, in a situation of the market being negatively impacted, let’s compare the behavior of two different investment portfolios: A. Traditional Investment Portfolio and B. Stabilized Investment Portfolio.


An example chart, source: LifeXcel LLC

A. A traditional investment portfolio in our example comprise of 50% bonds and 50% equity. If the market was down 10%, the equity value may be decreased to 5%, and 2.5% for bonds being less volatile as an asset class. To summarize, this portfolio may result in 7.5% negative loss during the market downfall.

B. On the other hand, a stabilized investment portfolio consisting of 40% bonds, 40% equity and 20% in life settlements may experience a decrease of 4% in equity and subsequently 2% in bonds. The allocation in life settlement contracts will remain unchanged, due to non-correlated nature. As a result, this portfolio may result in 6% loss to the investor.

In comparison to a traditional portfolio, a stabilized portfolio example shows a marginal stabilized value of 1.5%.

Since the past 20 years, the life settlement industry has grown exponentially. According to a report published by The Deal – a business intelligence news service- in 2018, there was a 28% increase in life settlement policies sold and a 35% increase in volume by face amount. Furthermore, according to a forecast report by asset management firm Conning, the life settlement market could see a double-digit expansion in the next 10 years. They predict that the market could reach $212 billion in cumulative life settlement transactions by 2028. Investors’ institutional pool is continuously looking for more policies to purchase, and the trading of life settlement contracts is becoming more transparent.

Due to its non-correlated nature with other financial products, life settlement contracts should be viewed by accredited investors as a lucrative alternative asset class for an investment portfolio diversification, risk-adjusted returns, and potential enhancement of their overall portfolio performance – especially during times of financial market volatility.

To learn more about adding this product to your or your client’s portfolio, contact one of our specialist at VIP@Life-Xcel.com or 213–533–9002 


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