Life settlements are a unique and increasingly popular alternative investment that allow investors to purchase life insurance policies from individuals and collect the death benefit when the insured passes away. This creates an asset class that is uncorrelated to stock markets, driven by actuarial science, and capable of producing attractive, steady returns when structured properly.

While life settlements may seem unconventional, they have matured into a well-established institutional market backed by actuarial data, decades of case history, and growing investor demand. This article explains what life settlements are, how they work, why institutional investors are allocating to the sector, and what risks and considerations retail investors must understand.

1. What Life Settlements Are

A life settlement is a transaction where an individual sells their life insurance policy to an investor for more than the surrender value offered by the insurance company, but less than the policy’s death benefit.

From there:

• The investor becomes the new owner of the policy
• The investor becomes the new beneficiary
• The investor is responsible for paying all remaining premiums
• When the insured passes away, the investor collects the death benefit

This transforms a personal insurance product into an investable asset with predictable cash flows and statistically modeled life expectancies.

2. Why People Sell Their Life Insurance Policies

Individuals sell their life insurance policies for many reasons:

• They no longer need the coverage
• Premium costs have become too high
• Their financial circumstances have changed
• They want cash today rather than a future benefit
• Their dependents are financially independent
• They prefer liquidity in retirement

For many policyholders, a life settlement provides significantly more value than surrendering the policy back to the insurance company.

3. How Life Settlement Investments Work

Most investors gain exposure to life settlements through specialized funds or platforms. The typical structure involves three stages:

A. Policy Acquisition

The fund identifies attractive policies based on:

• Age and health of the insured
• Premium obligations
• Death benefit size
• Insurance carrier credit quality
• Policy type (often universal life)

The fund purchases the policy for an agreed price.

B. Premium Payments & Monitoring

The fund becomes responsible for:

• Paying ongoing policy premiums
• Monitoring the insured’s health
• Managing actuarial life expectancy updates
• Ensuring the policy remains in force

Premium payments continue until the death benefit is paid.

C. Maturity & Payout

When the insured passes away:

• The insurance company pays the death benefit
• The fund collects the proceeds
• Returns are paid to investors based on fund structure

Returns often fall in the 8%–14% annualized range in diversified portfolios.

4. Why Institutional Investors Allocate to Life Settlements

Life settlements carry several characteristics that make them appealing to pensions, endowments, hedge funds, and family offices.

A. Uncorrelated to Markets

Life settlement returns depend on mortality, not:

• Interest rates
• Stock markets
• Credit spreads
• Commodity prices
• Economic cycles

This makes them one of the purest non-correlated assets available.

B. Predictable Actuarial Modeling

Life expectancy tables and medical underwriting give investors statistical confidence in:

• Expected return timelines
• Premium schedules
• Cash flow projections

This reduces uncertainty, especially when investing in large pools of policies.

C. High Potential Returns

Life settlement funds can generate strong yields due to:

• Discounted purchase prices
• Guaranteed death benefits
• Carefully optimized premium strategies
• Diversification across many insured lives

D. Attractive Diversification Benefits

Adding life settlements to a portfolio can reduce volatility because they respond to a completely different set of economic drivers.

E. Large Policy Supply

The U.S. life insurance market is enormous. Millions of policies lapse or are surrendered each year, creating a steady supply of potential investment opportunities.

5. Types of Life Settlement Investments

Life settlements come in several forms, each carrying different risks.

A. Traditional Life Settlements

Purchase of a single universal life policy from an elderly insured individual.

B. Premium-Optimized Structures

Funds actively manage premium payments to reduce costs while keeping the policy in force.

C. Viatical Settlements

Policies purchased from terminally ill individuals with short life expectancies.
These offer higher returns but more sensitive legal and ethical considerations.

D. Structured Life Settlement Funds

Diversified portfolios containing:

• Dozens or hundreds of policies
• Multiple insurance carriers
• Varying insured ages and health profiles

This is the most common approach for institutional investors.

6. Key Risks in Life Settlement Investing

Despite its advantages, life settlements require careful attention to several risks.

A. Longevity Risk

If the insured lives longer than expected:

• Premium payments increase
• The return is reduced
• Cash flow timing is delayed

This is the primary risk in the asset class.

B. Premium Increase Risk

Insurance companies may increase policy premiums — especially universal life policies — which can materially impact returns.

C. Liquidity Risk

Life settlements are long-term, illiquid investments.
Funds typically require multi-year lockups because payouts depend on the insured’s life expectancy.

D. Legal and Regulatory Risk

Life settlement rules vary by state and may change over time.

Funds must comply with:

• State insurance regulations
• Privacy rules
• Licensing requirements
• Consumer protection laws

E. Underwriting Risk

Accurate underwriting requires:

• Medical knowledge
• Actuarial skill
• Carrier evaluation
• Policy structural knowledge

Manager expertise is critical.

F. Ethical Considerations

Investors must be comfortable investing in a strategy tied to human mortality.
Reputable managers enforce ethical, professional standards and maintain respectful practices.

7. What Investors Should Evaluate in a Life Settlement Fund

Before investing, consider the following:

A. Diversification Across Policies

Larger pools reduce longevity risk by averaging outcomes across many insured lives.

B. Manager Track Record

Key indicators:

• Loss history
• Premium management strategy
• Historical life expectancy accuracy
• Experience across insurance carriers

C. Cost and Fee Structure

Ensure transparency around:

• Premium reserves
• Management fees
• Performance fees
• Servicing costs

D. Insurance Carrier Quality

Policies from highly-rated carriers carry lower default risk and more predictable outcomes.

E. Actuarial Models Used

Top funds use:

• Multiple life expectancy providers
• Independent validation
• Updated medical data
• Statistical re-forecasting

Conclusion: Life Settlements Provide a Unique Blend of Yield, Predictability, and Non-Correlation

Life settlements are one of the most differentiated alternative assets available. They combine:

• Predictable actuarial modeling
• Attractive, bond-like returns
• Zero market correlation
• A mature institutional ecosystem

But they also require:

• A long-term horizon
• Comfort with mortality-based investing
• A strong fund manager with deep underwriting capabilities

For investors seeking income and diversification away from traditional financial markets, life settlements can be a powerful addition to a sophisticated alternative investment portfolio.