Introduction to Life Settlements

History: Birth of a New Asset Class

In 1911, the United States Supreme Court ruled in Grigsby vs. Russell that insurance policies are legally viewed as financial assets which may be sold to a third party at the owner’s discretion.  This court case is the foundation for the large and growing secondary market for life insurance in which policy owners can receive fair market value for their policies rather than accepting the typically lower cash surrender value offered by the issuing insurance company.

A life settlement is the sale of an existing life insurance policy to a third-party investor for more than its cash surrender value but less than its net death benefit. Life settlements are an option for policyholders who determine that their current policy is about to lapse, is underperforming, or is no longer needed due to changes in the owner’s personal or financial circumstances. Through a life settlement transaction, a policyholder can convert an unwanted life insurance policy into a lump sum cash payment. The new owner/investor buys the policy at a discount to its face value and assumes the future premium payments. The investor typically holds the policy until maturity (death of insured) at which time the investor receives the death benefit payable under the policy from the issuing insurance company.

The amount paid in a life settlement is based primarily on the life expectancy of the person insured, the face amount of the insurance policy, and its ongoing premium requirements. From the original owner’s standpoint, a life settlement typically is a more lucrative alternative to letting the life insurance policy lapse or surrendering it to the issuing insurance company, essentially turning a non-productive asset into a productive asset. Thomas Schantz Life Settlements

We don’t all need life insurance throughout our entire lives, any more than we do auto or homeowners’ insurance. If you no longer drive a car, you don’t need auto insurance. If you no longer own a home, you don’t need homeowners’ insurance.

In circumstances like the following, an individual may no longer need life insurance or may not want to carry the burden of paying the ongoing premiums: First, when a husband and wife have accumulated enough assets and income streams to independently care for themselves. Second, when children are self-sufficient adults. Third, when an estate is too small to owe estate taxes or liquid enough to pay the estate taxes. “The ability to sell their policies as a life settlement enabled policy owners to receive an amount more than four times greater than what they would have received had they surrendered their policies to their insurance companies.” – London Business School Study, June 2013.



With several instances of major market volatility since the year 2000 and the adverse effects these instances have had on many investment portfolios, more investors and financial experts are looking at other financial alternatives to help boost returns. An investment in a life settlement offers an excellent way to diversify any portfolio and also serves as a great defensive strategy since the return is generally not dependent on or affected by a soft economy, stock market volatilities, interest rate fluctuations, unexpected global events, or other traditional economic factors. “Life settlements are one way to reduce a portfolio’s exposure to sudden downturns in the stock and bond markets,”-Conning Research & Consulting, Inc. 2007 study, “Life Settlement Market: Increasing Capital and Investor Demand”. The life settlement market was established by institutional investors and Wall Street firms, such as Berkshire Hathaway and Deutsche Bank, who have invested in life settlement portfolios and have been aware of the advantages of this asset class for years. Thomas Schantz Life Settlements


The return on a life settlement is contingent upon the maturity of each life insurance policy, which occurs upon the death of the insured.  The return is a function of the death benefit collected minus the cost to acquire the policy, the premiums paid to maintain the policy, and other policy servicing fees.

With the exception of “when” the policy will mature, all other costs can be reasonably estimated such that projections can be done in advance to illustrate the projected returns at various points in time. This sensitivity analysis provides a range of outcomes that can help investors quantify their decision making process.

The use of independent third parties to provide life expectancy underwriting provides the estimate of “when” the policy will mature. Independent underwriting firms utilize specific actuarial tables and in depth medical analysis to estimate life expectancies. Thomas Schantz Life Settlements


Investing in life settlements provides for the opportunity to earn attractive yields, particularly in today’s low interest rate environment. Projected returns for life settlement investments can typically range from 6% to 10% in a fully managed fund scenario, depending on different fund attributes.

These returns are certainly better than any of the equity markets and major market indices since the new millennium hit. The Dow Jones Industrial Average has returned an average of around 4% from the year 2000 through 2019. Given the historic performances and current economic, political and global landscapes, market indices could continue to be uncertain for the foreseeable future. Thomas Schantz Life Settlements


Portfolios and policies involved in life settlements are generally issued by highly rated insurance companies such as Met Life, Prudential, John Hancock, Mass Mutual, and New York Life.  Many of these institutions have been in existence for over 100 years and represent some of the strongest companies in the world.  The claims paying ability of these entities is independently reviewed by rating agencies such as A.M. Best Company and Standard’s & Poor’s (S&P). Thomas Schantz Life Settlements


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