Life Settlement Investments in Small Face Policies
On the surface, life settlement investments seem very straightforward. However, there are a wide range of options and products. Beyond the specific life settlement investment vehicle, the choice of target policy size must be considered before investing in the asset class. Even when two investors employ a similar life settlement investment strategy, if they target policies with different policy sizes they may ultimately end up with different rates of return.
From a pure investment standpoint, the available policy market can be thought of in three distinct segments. Policies with a face amount of $5 million or more are considered jumbo policies. The second, and most active segment, is the $500,000 to $5,000,000 range of policies. Finally, anything less than a $500,000 face amount is considered a small face policy.
Often overlooked in life settlement investments are the small face policies. As with any investment class, segments overlooked by the majority of investors sometimes present an opportunity to yield the best returns. In fact, Life Settlement Investments Finder calls small faced policies a "life settlement investment diamond in the rough". Small face policies represent an underutilized and attractive investment opportunity within the life settlement market. Not only is there less competition for smaller policies, but the investment characteristics are favorable for the investor.
Small face policies represent the majority of the in force life insurance policies, but only a minority of the policies sold in life settlements. Much of the institutional investor focus has traditionally been on policies with death benefits above $500,000. That means there is less capital chasing small policies and the segment is less competitive for buyers trying to acquire assets. This allows for better internal rates of return (“IRR's”) and higher win rates.
In general, small face policies are originally purchased earlier in life to take care of loved ones, or say pay off a mortgage, after a bread winner dies. They are consequently purchased while insureds are relatively young. Many larger policies, on the other hand, are often purchased for estate planning purposes and issued for older insureds. Since life settlements are focused on seniors, larger policies tend to be newer than smaller policies when they hit the life settlement market.
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