Socially responsible investing is the idea that people want to put their money behind organizations that balance their profit-making agenda with activities that also create societal benefits. Interwoven in the socially responsible investing theme is the idea that investors want their belief systems supported in their portfolios. Correspondingly, for example, they are antagonistically biased against investing in companies that in their opinion promote societal harm like gaming, firearms or alcohol perhaps. Simply put, the heart strings control the purse strings.
However, just because an investment is socially beneficial, the principals of evaluating risk and reward apply agnostically regardless of the company’s mission. Solyndra, the highly-touted center of the renewable energy universe, despite the lofty goal of leading the environmentally conscious energy sector, failed to be sustainable which unfortunately benefitted neither the environment or the investor. Being responsible is always good but it isn’t always good for business.
Selecting sustainable, socially responsible asset classes for inclusion in a beneficent investor’s asset allocation should create a value chain that benefits both buyer and seller. One such example is a Senior Life Settlement.
Life Settlements Create Value for Buyer & Seller
A Senior Life Settlement transaction begins when an insured decides that their life insurance policy no longer suits their needs. The Senior Life Settlement market has emerged out of necessity. Many seniors are finding themselves in a precarious position that their coverage has either become too burdensome on their budgets or the reasons for which the policy was originally purchased have changed. Investing in the Senior Life Settlement asset class provides much needed or wanted liquidity for the senior insured and creates value for the investor in a predictable way unlike anything else under the sun.
Until the Senior Life Settlement market developed, an insured only had two options available for the disposition of their life insurance policy and neither choice was beneficial for anyone but the issuing insurance company. They could stop paying the premiums causing their policy to lapse at a total loss or accept the original issuing life insurance company’s surrender offer. Prior to the emergence of the Senior Life Settlement market, billions of dollars of value evaporated every year due to the insureds lack of knowledge that settlement was an option.
Disrupting the Life Insurance Monopsony
The secondary or Senior Life Settlement market has disrupted the monopsony that insurance companies once possessed. Until the Senior Life Settlement market emerged, life insurance companies had absolute pricing power over the insured as they alone set the surrender offers to their insureds. This new source of liquidity for seniors has proven to be quite significant.
In 2010, the U.S. Government Accountability Office issued a report on the state of the Life Settlement market. At that time, the analysis of over 1,000 transactions proved that a Life Settlement transaction was indisputably preferable to the insurance company’s heavy-handed methods. Seniors that executed a Life Settlement transaction received as much as 4-8 times more than they would have from surrendering the policy to the insurance company. The GAO study concluded that Life Settlements delivered $269M total versus just $37.4M total from policy surrenders. Consider the impact that would have on a family member struggling to make ends meet.
Life Settlements Provide Diversification Against Market Volatility
In an investment world where risk is difficult to quantify, Senior Life Settlements are very simple. For an investor, the store of value is the contractual obligation of a highly rated, US Legal Reserve life insurance company. The spread between the investor’s acquisition cost (purchase price to the insured plus the premium escrow) and the face amount of the policy is the Total Projected Yield from the investment. Senior Life Settlements are assets that are highly non-correlated to market forces. The only trigger affecting the purchaser’s receipt of the death benefit is the mortality of the insured. Relative to other risk-adjusted, fixed-income investments, the return characteristics are attractive and there are no human or other variables like manager performance or geo-political upheaval that affect the outcome.
Life Settlements Provide Predictable Built-In Growth for Advisory Firms
One element of investing that is rarely discussed is the role that the order of returns plays in wealth accumulation. For instance, say an investor is over-weighted in real estate within their overall asset allocation. If it was the investor’s intent to liquidate their real estate holdings and reallocate their portfolio to produce more income for retirement, the timing of the reallocation, had it been executed in 2006, would have been nearly perfect selling out at the pinnacle of the real estate bubble that caused the credit crisis. If the investor had waited only one more year before reallocating, the results would have been devastating.
Senior Life Settlements are all about time…not timing. The total cost and projected yield of a settlement, unlike the real estate example above, is known in advance. The investor has the advantage of permanence and predictability because the only unknown is the amount of time to portfolio maturation. But that is no different than a market-traded instrument because it may have taken decades to amass a position in real estate, stocks, bonds, etc. but there is no way to know what market conditions may exist when the investor intends to reallocate assets for retirement or any other aspirational objective.
For an advisory firm, adopting the philosophy of allocating a portion of their clients’ portfolios to Senior Life Settlements comes with the advantage of predicting growth. The timing of the policy maturity events is on a level playing field with the unknown of predicting the health of markets at some point in the future. However, there is a natural advantage gained by the highly non-correlated nature of Senior Life Settlements to reduce the effects of market volatility, timing and the order of returns. With all things, there is always an element of risk. The advisor’s constant challenge is to maximize returns while minimizing risk. By reducing the risk of investment to the singular element of time, knowing that you have improved the quality of someone’s life, you and your clients will effectively do well by doing good.
Learn More About Life Settlements
Capstone Alternative Strategies can help differentiate you and your firm in a socially responsible way. The Senior Life Settlement Asset Class is a powerful story…We want to help you tell it. Call Jason Bokina at 404-504-7006 or email contact@capaltstrategies.com.
Michael J. Bradburn Michael Bradburn started his career as President and General Manager of a small automotive sales conglomerate, where he oversaw and managed several domestic and Asian manufactured retail dealerships. After selling the dealerships, Michael then worked with Prudential Preferred Financial Services in life insurance and annuity sales. He later advanced his career in private wealth management at Morgan Stanley-Dean Whitter and subsequently Merrill Lynch. Following that, Michael served as Chief Financial Officer of a metals manufacturing and distribution startup, where he was instrumental in securing patents and developing a completely virtual, vertically integrated, manufacturing and distribution technology serving the global powder metallurgy industry. At Capstone Alternative Strategies, he oversees marketing and advisor development. Michael attended Indiana University where he became a member of the Sigma Chi fraternity and later earned his BS from Ball State University.