iStock-1006499550
Michael Bradburn August 03, 2018

The Supply-Side Perspective of Crowdsourcing in Alternative Investments

SHARE

Crowdsourcing is a supply sourcing model in which individuals or organizations obtain goods and services. These services include ideas and finances, from a large, relatively open and often rapidly-evolving group of users tied together by the utility of the internet. It divides work between participants to achieve a cumulative, significant result.

Crowdsourcing mostly focuses on the demand-side of the equation. The hard part of the riddle is usually how to create scalable buyer interest so that capital formation is significant enough to bare the expense of building the technology platform where the supply and demand exchange takes place. The most common usage of the crowdsourcing concept is in the term Crowdfunding which clearly focuses on demand.

The real catalyst in the crowdsourcing phenomenon value equation is the source of the supply. That's the secret sauce. It is the product or service for which you are willing to spend your money to obtain that drives successful ventures.

  • eBay started off as a high-tech yard sale
  • Uber capitalizes on under-utilized automobiles for transportation services
  • Airbnb created an entirely new hospitality segment
  • Amazon takes commercial crowdsourcing to an entirely new level and innovates so quickly, to try to define it seems futile

Finding a rare source of ubiquitous supply of a valuable commodity that can be monetized at a scalable level is where these new innovative markets are born.

There is an opportunity that exists in the alternative investment space that capitalizes on the crowdsourcing concept with one notable difference from the household names listed above. It derives its value from an inefficient market:  Senior Life Settlements.

Millions of Americans own life insurance policies. Just like the things that people no longer need or want that they put up for bid on eBay, life insurance can become one of those things that you can turn into cash if you know how to do it. Few people do.

What's truly astonishing is that lots of people just throw their life insurance away. Every year, hundreds of thousands of life insurance policies worth billions of dollars are discarded like an old broken down piece of furniture taking up space in your basement. Your life insurance policy may be worth a ton of dough.

So how did the life settlement industry come about and why haven't you ever heard of it? Well, as I said before, it is an inefficient market and it's been a very well-kept secret that the life insurance carriers would rather you not know about.

Life insurance is a very, very large industry that plays a vital role in helping people and families insure against the financial loss of a loved one, a key employee and all kinds of potential financial risks that people suffer from an unfortunate and untimely exit from this world.

But over the course of time, things change. Some of the reasons why someone bought a life insurance policy may no longer exist. Children grow up and lead successful lives, businesses get sold, premiums strain budgets and so on.

The problem is that the insurance companies have always had a power hold over their insureds by limiting their options if they decide their coverage no longer meets their needs.

Until the life settlement industry came along, you only had two choices: Surrender your policy to the carrier for a non-negotiable price or stop paying premiums, lapse your policy and lose everything. Folks just don't know there's a third option.

A life settlement transaction is where an insured, typically a senior aged 65 or older, turns to a Life Settlement Provider for help. A Provider is licensed by the individual states to work with insureds and their representatives to maximize the value of their life insurance policies.

In a senior life settlement sale, based on an easy-to-understand valuation process, the Provider will price the policy and solicit bids from multiple purchasers to assure the seller has the best chance to maximize the value of their policy. The life settlement trade makes a market above the carriers' surrender offer but less than the face amount of the policy.

The crowd sourcing analogy now comes full circle. The value to the seller is obvious. Once they have made the choice to sell their policy, it's all about getting as much for it as possible.

But there's also more value down the food chain. Think about the buyer. The buyer of a life settlement has purchased someone's policy for a lump sum payment, assumes the premiums and now owns the right to receive the death benefit when the original seller passes.

Bundling multiple policies into portfolios creates diversification against the risk of any one policy taking significantly longer to mature than another and thereby creates a very interesting alternative asset class.

Since a life insurance policy's pay out is only contingent on the mortality of the insured, as an investment, it has very attractive qualities. It is highly non-correlated to any traded market, avoids complications by movements in interest rates and is agnostic to political turmoil.

Adding senior life settlements to a risky portfolio of stocks, bonds and real estate can help smooth out the rough edges by creating a high-yield investment with a known cost and a known yield. As with most true alternative investment opportunities, it is the inefficiencies in the market that create value. Capstone Alternative Strategies is a specialist at finding and unlocking the hidden value in life insurance.

If you are a senior with an unneeded or unwanted policy, a Registered Investment Advisor (RIA) with senior clients or an insurance agent losing your book to high lapse and surrender rates, Capstone would like to talk to you.

To continue following us, please subscribe to our News and Views blog by visiting our section on our website. To learn more about us and how we can be a resource in this space, contact Jason Bokina at 404-504-7006 or email contact@capaltstrategies.com.