A life settlement fund is a pooled investment vehicle that acquires existing life insurance policies as investments. A life settlement itself is a transaction in which a policyholder sells an in-force life insurance policy to a third party for more than its cash surrender value but less than its eventual death benefit. A life settlement fund raises capital from investors and uses it to purchase a portfolio of these policies, then continues to pay the premiums and ultimately collects the death benefits.
The fund’s return is driven by the difference between the price paid for the policies plus ongoing premiums and the death benefits eventually received. Because returns depend on actuarial assumptions about life expectancy and on continued premium payments, life settlement investing carries distinct risks and regulatory considerations, and the legal treatment of these investments should be reviewed carefully.
Related questions
How do life settlement investments work? A fund buys life insurance policies from policyholders, pays the ongoing premiums, and receives the death benefits when the insureds pass away. The return reflects the spread between the total cost of acquiring and maintaining the policies and the benefits collected.
Who invests in life settlement funds? Investors are typically institutions and qualified individual investors seeking returns that are largely uncorrelated with traditional financial markets, since policy outcomes do not move with equity or bond prices.
What are the risks of life settlement investing? Key risks include longevity risk, meaning insureds living longer than projected and increasing the premiums paid, the need to keep funding premiums, liquidity constraints, and valuation and regulatory uncertainty. Accurate actuarial modeling is central to the strategy.
How are life settlement funds regulated? Life settlements are subject to a mix of state insurance laws and federal securities considerations, and the regulatory classification of a particular fund or transaction depends on its structure. Counsel should confirm the applicable requirements before launching or investing.
