As an Advisor, you probably know more about your clients’ finances than anyone else outside of their family. We focus on their cash assets, with a glance at their life insurance holdings. This could be the cause of missed financial planning opportunities to provide a critical service.

Let’s set the stage. Life insurance represents, at its essence, a transfer of risk between an insured and the insurance company. When I was much younger, I owned life insurance as a “hedge” against my early death, to ensure that my homemaker wife and small children at home were financially secure in the event of my untimely demise. My income then was their future security. Billions of dollars of death benefit have been sold by financial planners on the premise that you should at least replace your income in case you die or get killed early.

Fast forward 40 years. The children are grown, educated, married, and have their own children. My wife and I are comfortable financially, but not wealthy. Our biggest exposure to financial disaster today comes not from early death, but from long term care (LTC) costs. We never bought LTC cover, and now it’s gotten too expensive.

Assume that I need LTC in a few years. How will we pay for that added cost and not leave my spouse in poverty? We could sell the house, but that will require that my spouse moves into lesser living quarters. That will be a heavy burden on her. We can liquidate some of our assets, but that will likely reduce her future income. What would you (or your client) do?

Take a look at that old life insurance policy. You can surrender it to the insurance company for the cash surrender value, provided that there is any. Or you can sell it to an investor. If you sell it to an investor, it will be offered to hundreds or even thousands of potential buyers. Buyers will often offer the seller multiples of their cash value. The insurance company won’t do that. Even if you had borrowed out ALL of the cash value, an investor will probably still buy your policy for a significant amount of cash. For a senior with an unwanted, unneeded or unaffordable policy, the liquidity gained from the sale can be used to purchase LTC coverage or simply improve their standard of living. The act on the part of the purchaser is a socially responsible investment.

Transactions such as this take place thousands of times per month. These are referred to as Senior Life Settlements. An easy definition of this transaction is the sale of a policy for MORE THAN THE CASH SURRENDER VALUE and LESS THAN THE DEATH BENEFIT. The seller will receive the highest cash from their policy that they can possible realize, because they are selling at auction to the highest bidder. The buyer will receive the death benefit at the death of the insured.

Would you do this? Would you sell a policy in this manner? There are many more reasons for a similar sale, but this illustrates the nature of many Senior Life Settlement transactions.

Now, for every seller, there must be a buyer. Would you be a buyer? When you do the math you probably would. You know a lot about the seller because you get to see their health history and one or more life expectancy estimates. You would have access to software and historical industry data that suggests the risk-adjusted yield is attractive compared to other riskier investments. And, because these are typically older and less healthy people, their life expectancy tends to be shorter.

Senior Life Settlement transactions were once bought by institutions, who could write a check for whole policies. There are still a lot of those transactions, but today there are “fractional shares” available where a group of investors buy a whole portfolio of policies to improve diversification characteristics. A Senior Life Settlement Investment is considered an Alternative Investment. Recent Advisor trends indicate that the low degree of non-correlation to market volatility and geo-political upheaval is increasing the popularity of alternative investments in their portfolios.

We are Capstone Alternative Strategies. Our name tells our story. We are consultants to Advisors who want to take their business up another level. In most cases our clients were NOT in the Senior Life Settlement business when we met. They needed to explore and investigate the asset class.

Capstone wants each of our affiliated Advisors to succeed. To learn more, call Jason Bokina at 404-504-7006 or email contact@capaltstrategies.com.