Life settlement investors include both institutions and individual investors. Although individual investors can participate in this market, the industry is dominated by institutional investors. Market participants are mainly investment management firms, such as banks, mutual funds, as well as alternative asset managers, such as hedge funds.
Not every life insurance policy that is purchased is owned for the duration of the contract. Policyholders can cash in on insurance products by selling contracts into the life settlement market. The value of a life settlement security is dependent on the condition of the policyholder's health and age. When an investor sells a policy into the life settlement market, the price tag is typically worth less than the payout would have been were the contract held for life.
An investor who purchases a life settlement contract must continue making the premium payments on the policy for its duration. Investors receive the life settlement payout when the original owner of the contract dies. A life expectancy is attached to the life settlement contract, and this date affects the ultimate return that the investor receives. In the event the original policyholder lives beyond the anticipated date, the payout could diminish. On the other hand, an investor could earn a higher profit if the individual dies sooner than expected.
Life settlement investors often seek returns that are not associated with traditional asset classes, such as stocks or bonds. Instead, returns are consistent over time, according to Chartwell Asset Management. Chartwell created Canada's first mutual fund dedicated specifically to life settlement securities.
Life settlement investors, including retirement funds, have been the intended victims of some scandalous investment activity. Scam artists have sought to manipulate both the sellers and investors of life settlement contracts amid light regulatory oversight of the industry. Although the legislation surrounding life settlements continues to mature, investors should still recognize the risks involved with these securities. For instance, the lifespan expectations for policyholders can be misleading, which can mean disappointing returns for investors.
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