Are Life Settlements Crash Proof?

It will be a while before the memory of bad real estate deals and overblown derivatives trading dulls in our minds. Gun-shy investors are looking for alternatives to the traditional stock and bond market in an attempt to recoup even a little of the losses that brought on a recession. And the life settlements market is delivering - in some cases, one life settlement company's five-year return outlook hovers around 62 percent. The industry's capital base saw a boost of 600 percent. So with numbers like that, how volatile is the life settlements market?

In truth, life settlements do have some inherent volatility, but are less volatile than their traditional financial market counterparts. In a recessionary market, sales prices and returns on investment will be lower as more people flood to the market looking for more stability. While the market is not likely to crash, there are the unknowns - insurance carrier bankruptcy, improved mortality rates, or insurance company credit risks. All these factors can add risk to the portfolio.
Life settlements differ from traditional investment markets in that there are tangibles that will always exist - the policy, the insured, and the death benefit. The unknown variable is the life of the insured. Expectancy can be calculated, but the length of the insured's life is far from an exact science. And while actuaries do an excellent job of modeling future life expectancies, underwriters are the ones doing the actual life expectancy calculations, a practice that's unlikely to change since insurance companies do not espouse the life settlements industry. Underwriters make a best guess based on complex calculations that factor age, health, and other unique class factors. Close, but the actual payout date could vary greatly from expectations, thus devaluing the life settlements deal. Not exactly a market crash, but certainly a market detractor.

Savvy investors get around the life expectancy volatility by adding more policies to the investment pool. This helps investors avoid losses should the insured group's shared underlying condition vastly improve due to medical breakthroughs. Also, investors need to examine the similarities among the pool insureds, specifically age, health condition, and life expectancies. A more diversified portfolio will be priced higher, but will come with seemingly less mortality volatility.

Another underlying risk to life settlements investors are the insurance companies themselves. The financial health of the insurer, as well as its premium practices, could adversely affect the value of the life settlements investment. For that reason, investors need to make sure there's a diversified insurer base. Too many policies issued by one carrier carries a much greater risk of loss than a portfolio with several insurance companies in the mix.

An ideal life settlement portfolio will have different age, health, gender, policies, and underwriting practices. Work with your life settlements broker to examine closely the characteristics of your particular investment group. Give Opulen Capital a call at 877-678-5361. Our life settlement experts can help you determine the volatility of your life settlement offers and help you make the right decision.