With life settlements getting more press then ever and Wall Street touting them as the next asset class the question that people keep asking is, are life settlements a good investment. The settlement providers certainly think so as do all of the funders in the marketplace. These funders run the gamut from large international and domestic banks to hedge funds, wire houses, pension funds, and family offices to individual investors (through life settlement funds). The reason they think the answer to the question, are life settlements a good investment, is yes because all of these investors are trying to diversify their investment portfolios with an asset class that is not tied to the stock markets or effected by the global credit crisis and the problems in Europe the same way “normal” investments are. They believe the uncorrelated nature of life settlements makes them the ideal diversification asset class.
But there are others that say the answer to the question are life settlements a good investment is no. Their reasons being that: 1) Life settlements are not the uncorrelated asset class that others make them out to be because they are still effected by the credit markets and interest rate hikes as these things affect the life settlement investors, by making the investors capital more expensive to the providers. This in turn affects the potential rate of return a policy may deliver, which causes the providers to be more selective about the policies they purchase or unwilling to purchase policies at all if none meet their ROI criteria. 2) Depending on the types of policies purchased they can be subject to insurance company risk if the insurance company has the right to lower the crediting interest rate and or raise the mortality costs (certain guaranteed policies are not subject to this) making them more expensive to own. 3) Life settlements are subject to longevity risk as no life expectancy company can accurately predict when one person is going to, rather the life expectancy reports are their best guesses based on the insured’s current medical information at the time of purchase. If the person lives longer the policy will cast more and the potential ROI will decrease. These are all things that affect are life settlements a good investment.
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