The Best Investment You've Never Heard Of

 Essentially what happens is we buy a life insurance policy from an individual who no longer needs it, wants it, can afford it, whatever the reason, they sell it. And then we give them money for the policy. We always give them more than the cash value or for or more than what they would get from the insurance company. Then we continue to make the premium payments. And when the individual passes, we collect the death benefit into our fund and it's distributed amongst the members of the fund. Kevin, welcome to the Better Well Show. Thank you very much, Caleb. Pleasure to be with you. It is an honor to have you on and we're going to be talking about life settlements, which for many people, that doesn't trigger anything because it's not like something that we know about or we don't necessarily learn about this in college. I remember hearing about life settlements for the first time and it was essentially, I was like, oh, you can invest in people's death benefit and it can be something that's not correlated to the market. And that's interesting to me. And it's like, is that morally okay? And like that makes sense. And we talk about the power of life insurance and all that stuff. And so I remember learning about it, remember meeting you probably six months after and hearing your story and all the things that you've done and you've made it so simple for me to understand. And then for a lot of reasons, we don't give investment advice. We're very, very careful to be a platform where we introduce people to concepts, but I'll make this very clear in this podcast that I'm not endorsing my listeners or people watching this to do any type of strategy. I just want to introduce them to concepts and people that are thinking outside the box that potentially could help people get results with their money. And so I just want to set the stage from a standpoint of this will be a super interesting podcast and video that we do. And my hope is by the end, people will maybe not be experts like you, but we'll know enough about this strategy and know if it's something that they want to learn more about and the pros and cons of it. Great. That's exceptional. All right. All right. So life settlements, one on one, you know, give us the one on one. And then I want to go into your backstory, but I just would love to hear from you. Like, what is the one on one behind why someone would invest in a life settlement and I'll let you break that down. Well, you know, if you go back to the beginning of 1911, a gentleman needed a surgery and didn't have the money. And so when he met with his doctor, he consulted with his doctor and he said, look, I don't have the money to do this, but I do have a life insurance policy that's, you know, there's a death benefit there. Would you take that for in trade, even though there was no cash value? And so the doctor decided he would take it and they did the surgery and a few years later, several years later, the gentleman passed and the physician went to claim the death benefit on the life insurance. The insurance company balked and said, no, you don't have an insurable interest in this and so you can't, you can't be paid. So of course litigation ensued and it went all the way to the Supreme Court and the Supreme Court. This Chief Justice at the time who wrote the opinion was Oliver Wendell Holmes. And his comment was, once you have passed the contestability period in a life insurance contract, it becomes personal property and people can do with it as they choose. That has been challenged many times and it has always been upheld. So essentially what happens is we buy a life insurance policy from an individual who no longer needs it, wants it, can afford it, whatever the reason, they sell it. And then we give them money for the policy. We always give them more than the cash value or for more than what they would get from the insurance company. Then we continue to make the premium payments and when the individual passes, we collect the death benefit into our fund and it's distributed amongst the members of the fund. We've been doing this now for approximately 13 years. We have purchased roughly 1800 policies over the over that time. We've never had a policy pay less than what we had anticipated. We, we put together a private equity fund. Essentially it's a pool of investors. We originally did this for ourselves. We both Jim and I had owned pieces of small policies and had good success with it. And one day we were playing golf and we both got a text from the company that we did this with and he got notice notification that he had received there's a death benefit that he was going to be getting. And I got notification that my policy needed an additional premium payment. And I said, man, wouldn't it be great if we could just pull these all together? Because I didn't get the time we owned about, I don't know, 15 or 20 of them. And so we looked into putting them into a pool. That way we could, when one had a victory, we shared in the victory. And when one, there was a burden, like a premium payment, we shared in the burden. It would smooth out the yield curve. And so when we realized that we could do it, we opened it up to some of our high value clients that had invested in the same asset class. We opened up to outside investors. In fact, my dad was our first investor. And it went from there. And after our first fund was put together, it became pretty obvious that this was going to be a beast. We were financial planners at the time and it became readily apparent that we were not going to have any time to do any financial planning anymore. So we stepped back from that. And we started offering this to clients. And then we had advisors who would come to us and say, can I refer some of my clients to you? And we said, we don't know. So we'll look into it. And we did and they can. It's not a problem. So that's where it started. And we are now on our 10th fund, private equity fund. Amazing. And it's worked out beautifully from day one. That's awesome. That's awesome. So to simplify this, there's a couple people in this equation. And I actually have a good friend who's on the other side of the settlement. So he's helping people that have their life insurance policies. He's helping them negotiate. He's like a broker. And so it's really cool. I might have to have him on to talk about the different side to this. The whole idea is you're creating a win-win scenario with the person that has a life insurance policy because at the end of the day, it's a free market. They can do what they want. And so instead of cashing it out and getting whatever, they're getting a higher value for their death benefit. And that's a point that I want to make real quick is when you set up life insurance, a lot of times people only care about the cash value, which I understand. But the permanent death benefit is an asset. And you guys are a perfect example of like, you will die someday. And so if you have an insurance policy that's going to happen for a sure date, that's incredible. And so that is an asset that you guys ultimately, you know, that you guys capitalize on. But you have that asset. And then so you create a win-win scenario. And I also want to say that a majority of these policies that you're probably buying are not the policies that we design. You know, we can go into that if you want from a standpoint of the typical policies that you get. But without, you know, these are not policies that are max funded from the very beginning with the mindset there. Their policies that people are getting maybe for an estate plan or perfect. There you go. You know, and so they're high death benefit, low cash value. And so there's a win-win relationship there. So the person that you're working with, they're getting more money. They're signing over the death benefit to the fund. It's a win because this is an asset that's not correlated to the market. And you're saying, hey, like we're going to continue to make premium payments. And when this person quote unquote matures, passes away, that death benefit is going to get paid to the fund. There's going to be less tax benefits than if the death benefit went directly to the family. But still we're getting a lump sum of money. And you're saying if you're an owner of that fund, you'll get passed, you'll get paid out when that happens, just like if you sold a real estate property or you sold a business in a fund. Exactly. It's exactly true. We always pay more than the cash value. Most of these policies that we purchase, we don't typically look for whole life policies. For the reason is simple. They're great for accumulating cash, but for our purposes, they're not what we're looking for because the premiums are too high. If we have a policy come to us, say it's a universal life policy and it's got cash value, the first thing we're going to do is look at using that cash value to make the premium payments so that it reduces the premium burden on the fund itself. Most of the policies that we get start out their lives as term insurance that is convertible to a universal life. We don't generally buy term insurance policies for obvious reasons. They'll term out and we don't want that to happen. So they have to convert it before we buy it. We work with brokers like your friend. And although we're very selective on who we work with, not saying that we wouldn't work with your friend, I don't know. In this business, relationships are key because it's an enormous trust factor. We never deal directly with the insured. We always have an arms length. We always use what's known as a life settlement provider, which is required by law in every state. And they have a legal representation that's required for them. Most of the time, the policy comes through an estate planner. Person may have an estate. They purchased a term life insurance policy to mitigate tax burdens should they pass in the next couple of years before they can liquidate or give away their estate. Once they've done all that, there are two to three years beyond that for maybe five years. And now they've got a policy that they no longer need. They probably never intended to keep it very long because it just simply needed to be there for a period of time, like I said, to mitigate the estate tax. So they can convert that policy to universal life. And we always recommend, look, if you want, you should check with the insurance company to see what they'll give you for the policy. That's pretty clear because they'll give you essentially what the cash value is. So when we buy the policy, their beneficiaries have been notified. Investors can buy the policy if they want. Most of the time beneficiaries do not have the kind of financial resources to do this, but they're certainly welcome to. So we get the beneficiaries to sign off as well. We've never been sued by a beneficiary for taking advantage of grandma or something like that. This is absolutely a win-win for our investors and for the insurer. The people who lose in this are the insurance companies. They don't really care for that. However, that being said, in this business, this industry is much larger than most people are aware. Berkshire Hathaway owns hundreds of millions of dollars, if not billions of dollars. I was going to ask you, Warren Buffett, invest massive amounts of money in this asset because, again, it's uncorrelated to other factors. Completely uncorrelated. If the economy goes up, down, or sideways, makes no difference. Since 1845, no B-plus or better-rated life insurance company in America has ever failed to pay on a death benefit. So our record has been 100%. We've always been paid exactly what we thought, sometimes a little more, depending on when they pay. But this market is much bigger than most people realize. The biggest player in this industry, our biggest competitor, believe it or not, is AIG. Now, AIG is an insurance company, but they also have a subsidiary that tries to buy these policies from, that competes with us to buy the policies from other insurance companies because they know they're going to get paid. They have an enormous portfolio of policies. So they're in the market and they are the biggest player. We're a speck on their windshield in truth. And again, in full transparency, I've known Kevin for, was it coming up on five years? And for the longest time, we just didn't do a podcast because I was in conflict of, okay, I want to be very careful not to give investment advice. The other thing I want to do is connect someone and whatnot that's not suitable or whatnot. But I kind of came to this epiphany that our clientele, the people that listen to this show, they're always looking for opportunities. Their mind's always going, we preach intentional living. We preach all the same type of principles. And I'm like, if I'm not going to introduce people, then they're just going to learn from someone else. And so that's when I called you up and I was just like, hey man, I want to do a life settlements one on one because there's not enough people talking about this. And it's a powerful fit for the right type of person. So let's talk about the pros and cons to if someone was going to invest some of their money into a life settlement fund. Obviously the big con that I can think of is just liquidity. This is not a type of asset that you have liquidity to. But overall, from an accumulation, something that's not correlated to the market, it seems like people are dying. So it's one of those things where what are some of the other cons and then what are some of the other obvious pros to why someone would want to choose this over the million other investment ideas and why someone potentially should think about putting some of their money into a life settlement fund. Well, having been in this industry for quite some time, the difference between a life settlement fund and really any other type of alternative asset, whether it be debt instruments that you're buying or commercial loans or bridge loans, oil and gas, real estate trusts all have great pros and some cons. The difference is at the end of the day, we are buying our growth in advance at a discount. We know what we're going to get paid. We just don't know when. Now every single dollar that we invest is guaranteed. The growth is guaranteed, not your principal. Your growth is actually guaranteed by American insurance companies. I don't know any other type of asset class that offers that. Now the con or the detriment to this is this is not a cash flow investment. This is a growth investment. And truthfully, what most of our funds will last about eight years because the average age of the insured in our funds is approximately 92 to 93 years old. So if they're perfectly healthy, how long will they live? And the answer is, I don't know, but probably not more than about eight years. What we tell people is this. If you know you're going to be needing your money inside of 10 years, do not invest it here. There are other things that you can put it in that are much more suitable. This is purely for growth, for money that you can't afford to lose, but you're not going to need right away. As money comes into our fund, it's held at Bank of Utah. We don't ever touch the money. We have a custodian. They manage all the money. Say we raise $10 million. We will deploy that $10 million into the marketplace and we will be looking for death benefit in the range of about $40 to $45 million to start with. So you have about a four or four and a half to one equity multiplier right out of the gate. Now, we actually don't spend all $10 million. We're going to spend only about $6 million because we're going to hold back probably $3.5 to $4 million to cover the premiums for the first two to two and a half years. Now as we begin waiting, because that's what this essentially is, is a waiting game, policies will begin to mature in the first year, two years. We've actually had almost every fund has had at least one or two maturities in the first year. That money is held in reserve at Bank of Utah. Even though it's come in and it's yours, it's the investor's money, it's held by Bank of Utah and it's used to replenish that premium reserve account because again, the most important thing we need to do is protect the asset of the fund. So after about year four or five, we've kind of reached that tipping point, as Malcolm Gladwell would say, where we've received enough cash in and we've reduced the premium obligation significantly enough to where we know we've got enough money to distribute and we distribute every quarter. Money goes directly into the investor's account. Most of the investors in this fund invest through a qualified account. Wow. Okay, so you can put, you can get qualified money? Absolutely. Probably 80 to 85% is qualified money. It's great for if an investor is considering a Roth conversion. This is a perfect asset for that because there is, because it's illiquid, the IRS will allow a discount based upon liquidity of at least 10%, which means you're going to save tax money in converting. There are also some other side benefits if you're considering a Roth conversion that we can help or explain to investors as needed. But it's a perfect investment for just money you're not going to need if you're going to give money to, leave money for family members in trust. We can do that. If you're going to just need it in retirement and it's cash money, that's fine too. I mean, it makes no difference to us, but we work with most self-directed IRA custodians are fine. We have a couple that we prefer because it makes it a lot easier and we've negotiated better pricing, but we don't have a dog in that fight. They're free to use who they choose. It's awesome, man. That's awesome. I appreciate you sharing all the ins and outs of that. The big thing is if you're needing the money within the next 10 years, it's just one of those things where, yeah, we could speculate, but let's not even be in that territory. This is for someone that's like, hey, I like the idea. I get the concept every time we say mature, that means ultimately someone's dying. The other thing that I just found really unique is when people get life insurance policy, they take a medical test and make sure the insurance company is like, I don't want to give you life insurance if you're not healthy. It's interesting because in this, you guys have them take a, not a health test, but you're essentially underwriting them for the exact opposite. You're like, hey, if you're like the healthiest 92-year-old, sorry, but if we pay you, it's going to be a lot less than if you're unhealthy. It's just interesting to see life insurance is essentially a promissory asset that's based on your mortality. That's what makes it so amazing is you're dealing with companies that have massive balance sheets that have been around forever, super solid, but at the end of the day, you're underwriting the same thing that they under it, but you're doing it 30, 40, maybe even 50 years after so that data is just so much more accurate. When we consider a policy, first thing we look at is the age of the policy because if the policy is inside of two years, we won't even look at it, not even touch it. Most of our policies are well beyond the contestability period, three years and beyond. We look to make sure that the insured has made at least some of the premium payments themselves because policies that are completely 100% premium financed are somewhat of a red flag and we don't want any red flags, which is one of the reasons we've never had a problem getting paid. We want to make sure that the insurance company is an American insurance company, the insured has to be an American individual. We're looking for age, but in addition to age, we do get two medically underwritten life expectancy estimates on each case from two independent companies that do this. The insured will sign a HIPAA release and allow their medical records to be evaluated. That is taken into consideration, but because the average age of the insured in our funds is so much older than most others, we focus on what does, how long will a perfectly healthy 92-year-old live? And for that, we subscribe to the CDC's Actuarial Department, their tables. And additionally, we subscribe to the VBT or the valuation basic tables, which is a large actuarial database that is put out by the insurance industry. It's more conservative than the CDC. The CDC takes all lives in America and uses that as their base, where the VBT only uses those who are insured. And so those are going to be healthier people. So it's going to be more conservative, but we will look at both of those numbers. And then once all that information is gathered, the policy has to pass five tests to determine whether or not it's even viable for us to consider. Once it is viable, then Jim and I will sit and talk, we'll look at the policy, look at the premium obligation, and sometimes we'll just pass because it's too big. It's going to be too much of a load. We're going to have to reserve too much money. So, typically a fund of ours will have anywhere from 30 to 50 policies in it. As I indicated before, when we start with an equity multiplier of about four to four and a quarter to one, which means that $100,000 investor is going to begin with, is going to have an equity multiplier over the next eight years of say four to one. So we'll turn into $400,000. Now, that's the best case scenario. Some people are going to live longer and that will eat into that return. But if we can deliver a three to one equity multiplier, which is very easily done and as happens most of the time, then we're going to still be able to deliver very good yield. We're interested in yield for our investors. That's the key. Yeah. Now, I know you got to be careful and take all this with a grain of salt, but what kind of rate of returns are you shooting for from a standpoint? And what would you say to somebody who's like, okay, I'm going to put a portion of my investment into this and what should someone who's going to do this be? Like if someone says, oh, you'll get 3% annualized in a perfect scenario, I'd be like, I don't know if I'm really interested. So what is typical and what are you guys shooting for? We target 10% to 12% annualized net of fees. And I'll explain the fees in a second. And honestly, that's the same target that we stated in our first fund. And in our first five funds, they're all doing about that. But subsequently, as we get better at this, we're able to buy better. And we have some economies of scale. We'd be pretty disappointed if that's all our later funds did. They're doing substantially better than that. But we're not going to change the target. We'd much rather under promise and over deliver than say we're going to get to 17% to 20%. Because there's an old saying, pigs get fed, but hogs get slaughtered. And we want to do the best we can for our investors. We keep the fees specifically low because we invest right alongside your clients. In every fund we own, we're going to have something at stake, some skin in the game. When we start the fund, we take a 1.5% or when an investor comes in, we take a 1.5% organizational and offering fee. And what that is, is that reimburses us for setting up the fund, for paying for the escrow, the custodian work, the printing, the legal, the accounting, what have you. So we front all that money. And then as investors come in, we get 1.5% of their investment as it comes in as a reimbursement. Then we have a management fee of 2.5% of whatever matures on the back end. And we don't get that until they get paid. We get paid when they get paid. So total of 4% over eight years, that's not bad in terms of cost. We have no ongoing fees in any fund. We have no recurring fees. I know that some of our competitors in this industry, I've seen as much as 2% upfront for organizational and offering, half a percent per year and 5% to 10% on the back end, which in my opinion is greedy. So we're not the biggest out there. We are boutique firm. But we do one thing and we do it very well. Yeah. And I appreciate the transparency there because there's, I don't need to tell you, there's a lot of, there can be some fog. Let's just put it that way as, what are people incentivized by? And I think, and again, this is not investment advice, but if you're looking at doing alternative investing, look at what someone's incentivized by. And it's like, you guys are directly incentivized to make this be successful because you guys are getting paid on the back of a successful result. And so that's awesome. And by the way, it's like knowing you for five years and knowing multiple people that have worked with you directly is also incredible and just the type of person you are. And so I appreciate you sharing that. And again, I don't want to make this episode longer than it has to be. Is there anything else that you would regret not stating if it relates to understanding an asset class like this? And it's like, obviously the next step is if someone wants to learn more, they can go to your website. We'll make sure to have a link down below. Absolutely. Maybe you have a different presentation. I just, I want to be the person that if someone's interested, they can go talk to you directly. And yeah, but anything else that you want to say from a standpoint of, that it would be good to know before taking action and deciding whether you want to do this or not? Well, no, I think we've touched on the main points. People are going to have additional individual questions. And I'm happy to answer them either via email or on the phone. If someone would like to speak with me personally, you can call us. We're in North Texas, about a town called Southlake. We're about 10 minutes to the west of DFW airport. My phone number is 817-479-9770. My email address is kevin at penumbra-solutions.com. If someone wants to watch a video presentation of what we do and how we do it, it is at the penumbraplan.com. That was my partner, Jim, just checking in. It's www.thepenumbraplan.com. It will ask them for a password. It is password protected and the password is all lowercase penumbra. P is in Paul, E-N as in Nancy, U, M is in Mary, B, R, A. Penumbra, okay. And then they're welcome to watch. And if they want more information, I can send them more information. But the easiest way is just to watch the video and then give me a call. Yeah, and we'll include all the contact info. And I'll just say this on behalf of Kevin. Watch the video before you just call him. I don't actually get many guests that give out their cell phone number. So that's a thank you. Thank you for that. No problem. And we'll make sure to put that in the description if you're watching this on YouTube. If you're listening to this, we'll make sure that it's in the show notes on a podcast. And so, no, I appreciate that. And there's, it's definitely something that hopefully can increase your financial IQ learning about. Is there anything else you want to say as it relates to life settlements? Because I have two other questions, but they're not related to life settlements at all. No, I think we've covered the basics. All right. So one thing that you have in common with some of the guests that come on the show is you've played me in ping pong, right? Would you like to enlight the audience on how that turned out, Kevin? Yeah, I think there was a humbling experience if I'm not mistaken, Caleb. It's only a matter of time until I lose badly to a guest. The running joke is if you beat me in ping pong, you'll magically never appear, because I got to keep the streak alive. But that's that my time will end shortly. But no, that was that was a blast. We played with our good friend, MC Lopcher, who's obviously another podcaster. And, you know, and it was it was a blast. I give him a hard time every time about ping pong. So that was that was a blast. And then the other thing that I just want to say, and this is just totally kind of goes 180 from what we were talking about. But I love to end all the shows with a legacy question. And the legacy question goes like this. If this is your last day on earth and you're with the people that you love the most and you can't give them any any book or talk or you can't get them this podcast, but you can just give them one conversation, what are you going to make sure to highlight in that conversation? Just love each other. And there's nothing like family. Yeah, that's enough. Yeah. Yeah, thank you. Yeah, I I I I appreciate that. The answer and I think one thing that we try to get our community to really think with the end in mind, because how you answer that should determine how you live your life today. And it's it's a it's a cool world we live in that we can be challenged and have content that can help us be more authentic in that in that. So, Kevin, I appreciate you, man. We'll have your contact down below. You included your phone number, your email, a website with the password where someone can learn more. And I would encourage people that if they're if they want to learn more, you are someone that will shoot it straight with them. And and I just appreciate that about you. And so I hope you have an amazing rest of your day. And until next time, man, work on that ping pong will play soon. All right. Absolutely. Better privilege, Caleb. Thank you.