From our previous post, Betting on Death, it is clear that despite the misconception of some unwilling to look past their initial impulse, life settlements are a socially responsible investment.
For some seniors, the capital provided by investors to purchase an unwanted, unneeded or unaffordable life insurance policy can provide relief from budgetary constraints or be a hidden source of liquidity. It’s hard even for the cynical press to paint that picture in a bad light when you know the facts behind a settlement transaction.
So, in the vein of playing misdirection, the title of this post was intentionally chosen to get your attention. And so that tact continues in this follow-on piece.
So, let’s take a look at stocks for comparison and contrast’s sake. Investing in stocks or equities takes place in a market. Speaking of not digging all the way to the bottom of the story, do you really know what the stock market is and why it exists?
The definitions you can easily find online or elsewhere do an adequate job of explaining how markets work, who the participants are and generally how it works. But they don’t explain what it truly is.
The stock market is a forward discounting mechanism. Price-to-Earnings (PE) Ratios, 10k’s/10q’s, earnings calls, research coverage and all the accouterments that comes along with equities analysis helps investors form opinions. A stock is said to be perfectly priced because all the aforementioned boils down to sentiment driving buyer’s and seller’s actions. The seesaw action of buys and sells balance all of that into the last print on the tape. Everything is known and represented in the price.
To be certain, markets create an orderly buying and selling process and it works pretty darn well. Right up to the point where Elon Musk Tweets some less than well thought out blurb about going private with funding in place or GiganticCorp’s CFO resigning for “personal reasons.”
My point, you have zero control. But stocks, bonds, real estate and other mainstream investments are familiar. Most people have an understanding of how they work and information is easily obtained. There is comfort in that. I get it. I get Stockholm Syndrome too.
To be fair, I am not trying to disparage any traded market. They have and will continue to be important tools in your wealth building arsenal. I used to be a stock jockey for a couple of the Wall Street monoliths and like so many high net worth advisors, I thought my solution was better. The Technology Bubble was a painful lesson. I learned that I was powerless against the machine.
I also spent several years in the life insurance business. I am a tremendous believer in the concept of life insurance. With a long-term approach and steadfast adherence to certain disciplines, insurance and investments shall set you free.
But as with all things, there is a human factor. People make decisions in their own unique way. As a former financial advisor, I don’t mind telling you that it was the “human factor” that ultimately led me in a different direction. It is very hard to save people from themselves.
That is the very reason I have been so inextricably drawn to the Senior Life Settlement Asset Class. The life insurance contract (emphasis on “contract”) as an investment is, to my knowledge, unlike anything I have ever seen in the investment sphere.
Business Law 101 states that in order for a contract to exist, there must be bi-lateral consideration. In exchange for the payment of a periodic premium to a life insurance carrier, said carrier promises to pay the stated death benefit to the designated beneficiary of the contract.
In a life settlement investment, an investor is buying the right to be that beneficiary. With everything else in which one can invest, it’s Caveat Emptor…Buyer Beware. In what other instance can you enter into an agreement to purchase a known spread between your cost basis and the face amount of a contract and then wait to get paid?
Obviously, the waiting part is the rub here. How long do I have to wait? Well, you have to wait until the selling insured passes away. But that’s not a bet…That’s an inevitability.
Let’s talk about the time element here. This blog is read by a very sharp group of people and discussions of the time value of money, internal rate of return and so on are often bantered around but the time and the order of returns are evenly distributed between life settlement investments and other market-based options in my opinion.
There are no guarantees in life…other than it will end at some point. There are certainly no guarantees to be had in volatile markets. In recent memory, the most potent example that comes to mind to illustrate this point was exemplified by the housing bubble and resulting credit crisis.
If you were a real estate investor and liquidated your holdings in 2005, you were a genius (read lucky). The same real estate investor that waited until 2006 to liquidate was far less fortunate (read bankrupt).
So, if a long-term outlook, ignoring market timing, steadfast discipline and a little luck are the keys to wealth accumulation, Senior Life Settlements are a risk-mitigated alternative investment class that provides significant advantages to hedge against the threats of volatility and uncertainty posed by market mechanisms.
So, to those that would say that life settlements are morbid and investing in them is betting on death, I am more than happy to take up the debate.
Life very rarely presents the opportunity to do well by doing good. I will certainly agree that at first glance, one might draw the inference that life settlements are sketchy or unsightly because they hinge on human mortality. But please take a closer look.
The Transamerica Center for Retirement Studies does an in-depth survey of the thoughts and fears of retirees and beyond a shadow of any reasonable doubt, the fear of running out of money late in life is a specter for many worse than death or debilitating illness.
The Senior Life Settlement industry makes a liquid market for needy or wantful seniors to monetize an unnecessary or unaffordable asset that the insurance companies are all too eager to let be squandered to their own selfish benefit.
As an investment, life settlements have risk mitigation and capital creation attributes that simply don’t exist elsewhere.
I’ll bet that if you do you homework, you will agree.
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