During their lifetime, most people buy life insurance.
Maybe they have a young family and want to be sure everyone is financially taken care of when they are no longer able to provide for them. Maybe it was to take care of another concern such as debt. Any reason for buying life insurance are valid at the time it is purchased.
However, things change. The young family grows up. Other risks diminish. Our assets have grown to the point that they are ample to support those we leave behind. All these things are good; if we have planned right (and been a little lucky) each year our financial situation becomes more stable.
Suddenly, the policy owner wakes up one morning and asks, “Why am I still paying on that no longer needed life insurance policy?”
At this point, one of three things happen:
The owner of the policy simply stops paying their premium.
Insurance companies love when this happens. The insurance company collected premiums for 10, 20 or even 30 years. If the owner has allowed the policy to lapse, the insurance company will never be obligated to pay a death benefit. Score this as a home run for the insurance company.
The owner of the policy “cashes in” the policy taking a “cash value settlement.”
Insurance companies like when this happens. The insured has selected an option that will pay him or her a fraction of the death benefit. This saves the insurance company $10s or more likely $100s of thousands of payments for a death benefit.
The owner of the policy “sells the policy” to an investor who will pay more than the cash value of the policy. In other words; the investor is buying the future “life settlement” of that policy.
In the “sell the policy” to an investor scenario, the investor:– Pays the existing owner (commonly the insured) an amount greater than the Cash Value. Hence, the original policy owner gets a greater amount of money for the policy than he would if he/she had accepted a Cash Value Settlement.
– Pays all future premium payments as they become due. So, the original owner has no further obligation.
The benefit to the new owner is that they will make themselves (or their business) the beneficiary of the policy thus, will receive the death benefit. This is where the name comes from. The investor is investing in the future death benefit also called the “life settlement”.
Why does this work for the owner of the life insurance policy?
In most cases, the life settlement buyer will pay more for the policy than the cash value amount offered by the insurance company.
Why does this work for the investor?
Receiving the life settlement can offer a respectable profit. Even after paying the policy owner to buy the policy and taking the risk of paying premiums for the rest of the policy holder’s life.
Investing in life settlements is not new.
Life settlement investing has been around for almost 100 years. The reason most people have not heard of it is because in the past, life settlement investors tended to be wealthy individuals who take a very long-term view of their investment portfolio and are concerned with the “reliability” of the investment.
Investing in life settlements answers the “reliability” question better than almost any other investment. Why is the payout reliable?
- The insured will expire.
- The insurance company guarantees payment of the life settlement.
Can a Self Directed IRA invest in Life Settlements?
YES, your Self Directed IRA can invest in life settlements.
What are the advantages of investing in life settlements in my IRA?
The settlement value (the death benefit) is guaranteed by the life insurance company. Life insurance companies are well-financed and closely regulated by the State so the payout is very secure. In addition, the investment results are not correlated to the stock market, real estate market, or general economy. Depending on how long or how short the insured lives, the returns can be generous. The longer the insured lives, the less the return.
What are the disadvantages of owning Life Settlements in my IRA?
Life Settlement investing generally does not pay a dividend. All the earnings come at once; after the death of the insured. This is like holding undeveloped land in your IRA and waiting for a buyer to come along. The holding period can be long. This will be dependent on the longevity of the insured and that holding period is out of your control.
Who should consider an IRA investment in Life Settlements?
Life Settlements are rarely a first investment in an IRA. First investments are generally those things that return income or cash flow such as rental property and promissory notes.
However, once those investments have been made and the IRA owner is considering longer-term potential growth; Life Settlement investing provides an interesting option.
Can my IRA invest in Life Settlements on its own?
Technically, the answer is yes. However, as a practical matter finding the policy seller, qualifying the policy seller, and dealing with the legalities of buying a life insurance policy is best left to professionals in that field. Hence, you will use a Life Settlement professional to help create a package.
For information about the Self Directed IRA or Solo 401k, call IRA Club at 312-795-0988
IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments.