The life settlement industry has been around for more than 100 years, and in the last 20 years has been gaining prominence amongst investors and life insurance policy owners. Life Settlements can be a powerful investment product for sophisticated investors that may provide further diversification to their investment portfolio, due to its non-correlated nature.
Unfortunately, many people are still unfamiliar with life settlements as a viable financial asset or are wary about investing in them due to preconceived assumptions and inaccurate representations about what exactly are life settlements and how they work.
In this article, we shall debunk certain misconceptions about life settlements with the optics on accurate information and education.
Misconception #1: Life Settlements Are Viatical Life Settlements
One of the most common misconception found is, whether life settlements and viatical settlements are the same things. By definition, viatical life settlements are when terminally ill insureds with a life expectancy of 24 months or less sell their policies to a third-party investor. Viatical life settlements emerged in the late 1980s during the onset of the AIDs epidemic. At that time, several patients were becoming terminally ill and needed urgent cash relief in order to pay for medical treatments. To lessen the financial pressure, patients began to realize as owners of life insurance policy they had the legal right to sell their unneeded policies in exchange for lump sum cash payment.
By the end of the decade, due to the emergence of effective AIDs treatments that help increased the life expectancies of terminally ill patients, viatical life settlements became less popular and life settlements were gaining popularity.
The major difference between a life settlement and viatical life settlement, is that in the former the insured is above the age of 65, with some minor health impairments and a life expectancy over 24 months.
In recent years viatical life settlements have been garnering a bad public reputation due to allegations of fraudulent transactions, deceptive practices, and the perception that they target terminally ill individuals. A consequence of this belief has also affected life settlements as well. As a result, life settlements and viatical life settlements being viewed as the same investment asset.
Misconception #2: The Life Settlement Industry is NOT Regulated
There is a frequent misconception prevalent amongst some investors and financial advisors that the life settlement space is unregulated, and practitioners regularly indulge in unscrupulous practices. On the contrary, the industry has in place strict regulations and guidelines.
Currently, 43 U.S states and the territory of Puerto Rico have comprehensive life settlement guidelines in place that protect the consumer rights of both buyers and sellers of life insurance policies, covering 90% of the US population.
Misconception #3: Life Settlements are Unavailable for Individual Investors
It’s important to note, that originally life settlement contracts were designed for corporate and institutional investors — an entity that invests money on behalf of other clients or members (for example hedge funds, insurance companies, etc.). For a period of time, individual investors due to high eligibility requirements could not partake in life settlement transactions.
This all changed with the advent of the California State Bill (SB 1837), enabling non-institutional investors an alternative way to access life settlement benefits through fractional ownership. Through this bill, life settlement providers can group policies bought from the life insurance secondary or tertiary markets into fractions and offer them individually to investors. It is also true that individual investors can invest in this asset class through life settlement funds. Now, the life settlement market is available to qualified and “Main Street” Investors.
Misconception #4: In Comparison to Other Financial Assets, Life Settlements Have Limited Benefits
When it comes to deciding where to invest life settlements are never high on top of an individual investor’s list. Obviously, this is because of a lack of awareness and a misconception about life settlements’ limited benefits as an asset class in comparison to other assets such as stocks, bonds, mutual funds, real estate, etc.
While being an underdog, life settlements are actually a unique investment product. The yield or investment gain is generated from death benefits and does not fluctuate with any market movements. One of its major benefits is non-correlation.
Misconception #5: Life Settlements Are Guaranteed Investments
In this industry, some brokers and institutions advertise that life settlements shall provide investors a “Guaranteed” return on investments with high double-digit attractive returns.
For instance, a former registered broker Dean Vagonzzi raised $32 million from 339 clients to invest in life settlements promising false returns. According to the SEC, as head of A Better Financial Plan, Vagnozzi encouraged the public to “invest like the big boys,” and publicized his firm as a place to buy life settlements. In his paid advertisements over the radio, he claimed they were the “highest yield, safe investments” in the market.
Apart from the situation of the Dean Vagonzzi case, there are other deceptive marketing examples where life settlements are presented as a “safe and guaranteed” investment asset class. The consequences of these marketing campaigns are unfortunate, leading up to investors are being misinformed and mislead with a false expectation of anticipated returns.
The irresponsible behavior of a few brokers and institutions have in a way blemished the industry, but investors should be aware that not all brokers and institutions in the life settlement space indulge in such false practices. There are many, who do provide their clients with sound information and a full picture regarding pros and cons as well as the risks and rewards.
The reason behind the spread of false information and bad reputation regarding life settlements is largely due to a lack of awareness and unethical practices by a few. On a positive side, the industry is experiencing a massive transformation and unification. As a result of the enactments of stringent regulations and growing initiatives to increase awareness, the life settlement market has a brighter future.
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