Warren Buffett knows a great investment when he sees one. Arguably the greatest value investor of all time, Buffett has earned a legendary reputation for his uncanny ability to spot the market’s best bargain opportunities — while consistently avoiding a whole slew of bad investments.

I could tell you Buffett was “wildly successful,” but that would honestly be an understatement. To put things in perspective, I’ll just say that Berkshire Hathaway’s total return between Buffett taking control in 1965, all the way up to 2023, adds up to 3,787,464%. That’s a compound annual growth rate (CAGR) of nearly 20% for almost sixty years straight — doubling the average return of the stock market during the same period, and vastly outperforming the average investor year-in and year-out.

Perhaps the most fascinating thing about Buffett’s success is how he makes no effort to conceal it. He’s not hiding away some secret strategy or special computer algorithm. Buffett personally writes each annual shareholder letter, just as he has since first writing a letter to his investing partners back in 1959.

Back when the stock market crashed in 2008, Buffett wrote a rare op-ed in the Wall Street Journal, urging Americans to “Buy American. I am.” And of course, it was a profitable recommendation.

Decade after decade, Buffett has endured and outperformed while new strategies and trends rise and eventually fall. Even now, he’s still using the same basic value investing principles handed down to him by Benjamin Graham all those years ago.

Value investing simply dictates that you should always know what you’re investing in … and never pay too much. So his team scours each new investment’s financial statements, they filter out the “hype,” and they drill down on a business’ fundamental value in dollars and cents. Then they only invest when the price is lower than their perceived value.

Yet there’s an exception to every rule… For example, it’s well known that one of Buffett’s favorite businesses in the world is insurance…

He appreciates the fact that insurance is strictly regulated, that premiums are paid religiously by policyholders, and that the excess premiums provide him a “float” that can be invested judiciously to grow wealth over time.

And when it comes to life insurance policies, Buffett freely admits that he’s willing to pay well above cash surrender value. In other words, the greatest value investor in history will gleefully overpay for your paid-up life insurance policy. Here’s why…

Life insurance is obviously an asset that’s built the long haul. But in some cases, it’s still possible to sell your life insurance policy to a third party in a process known as “life settlement” or “viatical settlement.”

Life settlements are generally available to policyholders over 65 years of age who have a shorter-than average life expectancy.

Meanwhile, viatical settlements are available to patients considered terminally ill, with doctors projecting just a few years left to live. Viatical settlements typically receive a larger percentage of their death benefit due to their circumstances.

I realize that might sound a bit grim, but it’s important to remember that a viatical settlement can open up a world of new options to a terminally ill patient. Your heirs will not receive a death benefit, but you might suddenly be able to afford experimental treatment that could save your life, or you might be able to fast-track some peace of mind for your heirs.

Life settlements can also be a great opportunity for “best-case” scenarios. If you’re already handing down a rich real estate portfolio to the kids, you can take a life settlement and effectively enjoy the investment you’ve made in your life insurance policy while you’re still around.

Just note that taking a life settlement or viatical settlement on a life insurance policy may affect your eligibility for Medicaid and other benefits, and it may also have tax implications.

The alternative is to take what’s called the “Cash Surrender Value” of your life insurance policy. Once again, life insurance is built for the long term. So taking the cash surrender value of your policy amounts to canceling said policy, which typically comes with substantial penalties (the terms of each policy will vary).

But with a life settlement or viatical settlement, investors like Warren Buffett will often be eager to pay you well over cash surrender value.

Just think about that for a second. Really marinate with it… Life insurance gives you an asset that’s so amazing that the greatest value investor in history is willing to pay a premium for it. Why?

Because in classic Buffett fashion, it’s all a matter of value. In this case, it’s about something called Human Life Value, or HLV…

HLV is the basis for life insurance policy value, and it’s all about the amount of cash that would be needed to help replace your income if you were ever gone. That means taking your annual income and multiplying it by the approximate number of working years you have left.

So someone with an estimated 20 years remaining in their career and a $100,000 salary can be insured for an HLV of approximately $2 million. That way, even a relatively meager return can keep your family in relative luxury for decades to come, if managed well.

As a result, you end up with an insurable asset (your HLV) that’s absolutely massive and not easy to undervalue. That’s obviously rare, and it’s a tremendous advantage that Buffett has clearly honed in on.

“The original policyholder is usually in good health when we purchase the policy,” as he revealed in his 2004 letter to investors. By purchasing life settlements from healthy policyholders aged 65 and over, Buffett is capturing some of the best compounding years that a policy has to offer — even as the average policyholder continues to outlive their life expectancy.

Who wouldn’t be happy to overpay for that?

Key Takeaways

• Warren Buffett’s legendary investment success is grounded in value investing principles, emphasizing understanding true value and avoiding overpaying — except in the unique case of life insurance policies.
• Buffett values insurance businesses for their regulated nature, steady premium cash flow, and the investment "float" that supports wealth growth over time.
• Life insurance policies represent a valuable, long-term asset tied to Human Life Value (HLV), which estimates financial replacement for lost income and career years remaining.
• Life settlements and viatical settlements provide options to monetize life insurance policies, often at prices significantly above cash surrender value, appealing even to savvy investors like Buffett.
• This strategy highlights the importance of viewing life insurance as a wealth continuity and risk protection tool, offering not just death benefits but also potential living benefits and financial flexibility.
• Understanding policy value beyond face amount and knowing appropriate timing for life or viatical settlements can unlock wealth that supports both legacy and present financial needs.

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