In 1911, a man in need of surgery but lacking funds turned to his life insurance policy. Despite there being no cash value, he managed to persuade his physician to accept it in exchange for the surgery. This transaction eventually led to a Supreme Court decision, where Chief Justice Oliver Wendell Holmes declared that after the contestability period, a life insurance policy becomes personal property that its owner can handle as they choose. This precedent has stood ever since.
Life settlements involve buying a life insurance policy from an individual who no longer wants or can afford it. The purchase price is higher than the policy's cash value but lower than the death benefit. Once purchased, the investor continues to pay premiums until the individual passes away, at which point the death benefit is collected and distributed among the fund's members.
Our Experience in Life Settlements
We've been involved in this business for 13 years, acquiring approximately 1,800 policies. Every policy paid at least what we anticipated. Originally, we began investing personally and soon recognized the potential of pooling resources. By combining policies, we could share the benefits and burdens, smoothing the yield curve. This led to the formation of a private equity fund, initially for high-value clients, and later for outside investors.
Our first investor was my dad, and after the success of our initial fund, we shifted focus entirely from financial planning to managing these investments. Today, we operate our tenth private equity fund, welcoming clients from various backgrounds.
The Value Proposition
Life settlements create a win-win scenario. The policyholder gets a higher value for their policy than cashing it out through the insurer, and investors receive returns from an asset uncorrelated with market fluctuations.
It's important to note that the policies we purchase usually have high death benefits with low cash values, often designed for estate planning. This provides more significant potential returns for the fund. While there are fewer tax benefits compared to a direct death benefit payout to a family, the investor receives a lump sum akin to returns from selling real estate or a business within a fund structure.
