How Life Settlements Help Investors Meet Their Socially Responsible Investment Goals

This article makes the case that life settlements are a strong form of socially responsible investment. In the past investors such as family offices, RIAs, and institutions have been attracted to the asset class due to its history of uncorrelated, strong returns. Interest has increased even further as they have learned more about how life settlement investments positively impact society.

Here we explain why that is the case and encourage those unfamiliar with the asset class to take a closer look.

Definition and First Impressions

A life settlement is the transfer of ownership and beneficiary rights of an unwanted and/or unneeded life insurance policy in exchange for a cash payment. The seller of the policy generally no longer has the responsibility of paying future premiums – those are transferred to the investor. In exchange, the investor profits from the difference between the death benefit of the policy and acquisition, additional premium payments, and administrative costs.

Most often, people who are learning about life settlements for the first time focus on that last part: the investor benefits when someone passes away. It can seem a bit morbid to some people. But for a moment, let’s instead focus on the time the policy is sold: who benefits then? The answer is the seller, of course. A deeper dive into the situations faced by many of these sellers, and how life settlements provide them with a solution they otherwise wouldn’t have had, helps to change the conversation.

Crises Facing Seniors Today

Sellers in the life settlement market are typically 70 years of age or older. As such, they are often facing one or more of the following societal crises:

1. Inadequate retirement savings
2. A need for expensive, long-term medical care
3. Poor alternatives for unwanted or unneeded life insurance policies

Crisis #1: The Retirement Deficit

It likely comes as no surprise to most people that U.S. seniors are not saving enough for their retirement. There are myriad statistics proving that point, but one eye-opening example comes from Fidelity Investments. They recommend people hold a minimum of 8x their annual salary in savings to use as income during retirement. Currently, about 80% of Americans have retirement savings of less than 1x their annual salary, and over 40% of Americans have no retirement savings whatsoever. Altogether, U.S. working households are a whopping $11.6 trillion short of Fidelity’s savings target. This means there are a lot of seniors searching for ways to reduce costs and/or increase income.