Life Insurance Policy Profits

- Article posted by Editor

OK, I must forewarn you that the following investment strategy might seem somewhat morbid however since it’s beginnings in the late 1980s, it has been a consistent performer, earning many investors anywhere between 12 and 25%+ per annum.

I’m talking about a little known and underutilized investment strategy called Viatical Settlements (Viatical coming from the Latin word, ‘viaticum’ which means ‘provision for a journey’).

Let me explain how Viatical Settlements work.

We all understand life insurance right? We pay an ongoing premium to an insurance company and in the event of our death, the insurance company pays out a pre-determined lump sum to our estate – nominated beneficiaries (e.g. family, friends, charities etc). Very straight forward process.

[SIDENOTE: If you are married or in a long-term relationship and you have kids but you don't currently have life insurance, I would highly recommend that you get some. The day that I obtained life insurance for myself and my partner (about 2 years ago), I felt a profound sense of relief as I knew that if something were ever to happen (heaven forbid), whomever was left behind (we have a 1 year old son) would never need to worry about money. Having life insurance actually makes me feel more abundant and at ease and I see it as such an important part of my overall investment strategy. OK, let's get back to Viatical Settlements.]

Theoretical Case Study Say Bob Jones is terminally ill with cancer and he has a life insurance policy with a death benefit of $500,000. Bob can sell his policy today to investors at a discount to his death benefit (agreed payout figure upon death). Let’s say Bob really needs that life insurance money now because he can no longer work and he needs to support his family as well as pay for medical costs. He could potentially sell his $500,000 policy to Joe Investor for $400,000 ($100,000 discount), which would bring Bob much needed financial relief (not to mention stress-relief) to him and his family. Joe investor would then become the policy owner and take on the responsibility of paying the monthly premiums to the insurance company to keep the policy active, which is an ongoing out of pocket cost to him. Then on Bob’s death, the insurance company would pay out the $500,000 lump sum death benefit to Joe Investor. Joe’s profit on the deal is the difference between the death benefit and what he paid to Bob Jones, less the premiums he had to pay the insurance company right up until Bob’s death. So if Bob died 12 months after selling his policy to Joe Investor and Bob’s monthly premium was $125 then Joe’s profit would be $100,000 ($500K-$400K) – $1,500 ($125 X 12 months) in premiums which equals $98,500. That equates to a return of around 24% in 12 months.

Now most of us won’t have a spare $400,000 laying around that we can drop into one single investment and still sleep at night, but the good news is you can actually gain exposure to Viatical Settlements for as a little as $5,000 or $10,000 via specialist investment providers and brokers.

Basically what will happen is your money will be allocated to a particular policy and you will be noted as a part owner of that policy. You may be just 1 of 50 or even 100 other part owners of single policy. The insurance premiums are paid on your behalf by the management company, which they then recover when the death benefit is paid out.

Now to put it into some realistic perspective, there are definitely risks involved for example, what if Bob Jones had continued to live for 10 years (or longer) before passing away because of advances in medicine. That would be an additional 9 years of premiums that would need to be paid out to the insurance company and your money would be tied up for that entire time. This would dramatically reduce your annual rate of return and prevent you from using that money in other better performing investments, which is an ‘opportunity cost’.

However even with these real risks, to date Viatical Settlements as a whole have performed consistently well and the industry is growing rapidly.

“With more than $9 trillion of life insurance in force, Sanford C. Bernstein & Co. estimated last year that the market for “used” policies already topped $13 billion and it could hit $160 billion by 2030.” Source: Wall Street Journal – 2006.

So is investing in Viatical Settlements right for you? Well, it depends. You should definitely get professional financial advice so that you fully understand the risks involved.

One of the oldest and most experienced participants in the Viatical and Life Settlement marketplace (Life Settlements are very similar to Viatical Settlements except that they policy seller is not terminally ill) is The Lifeline Program. They have facilitated thousands of transactions and helped to develop many of the standards and practices that define this industry.

Do Viatical Settlements sit right with you?

In addition to understanding all the risks and doing your due diligence on the different providers, you should also the emotional side of this investment strategy. Will you really be comfortable ’speculating’ on the death of another human being for profit? Cause that is what you are effectively doing.

However, on the flip side, you are also providing funds which support an individual and family when they need it and want it most, and that is a very big positive and something to feel good about.

I’ve personally given this a lot of thought and I’ve concluded that if I was in Bob Jones’ situation above I would really appreciate having that money and enjoying the rest of my life with my family in comfort, as opposed to watching them struggle. Wouldn’t you?

I know this investment strategy won’t sit well with some of our readers, however it is a strategy that has proven time and time again to be a sound one. If this is you, I hope that you’ve at least found this article to be interesting and that you’ve learned something new.

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