Life Settlement Investing

A life settlement is the sale of an existing life insurance policy to an investor or investment group. The policyowner sells the policy for more than the policy's cash surrender value, but less than the death benefit. After the policy is purchased, the investor becomes the owner or beneficial owner, assumes responsibility for future premiums, and receives the death benefit when the insured passes away. Pricing depends on life expectancy, death benefit, future premiums, carrier strength, and purchase price. If the insured lives longer than projected, the investor pays premiums longer and the return is reduced. If the insured passes sooner than projected, the return increases.

Life settlement investments are generally available to accredited investors. These are private, specialized investments and are not suitable for everyone.

An individual accredited investor generally means someone who meets at least one of these standards: net worth over $1,000,000, excluding the value of the primary residence; income over $200,000 individually, or $300,000 jointly with a spouse or partner, in each of the last two years with a reasonable expectation of similar income in the current year; or certain qualifying financial licenses or professional credentials.

Appel Financial focuses on policies that are more than two years old and beyond the normal contestability period. The process includes confirming that the policy is active and in force, reviewing premium requirements, verifying ownership and beneficiary changes, and working with experienced life settlement providers and administrators. Being beyond the contestability period does not guarantee payment. Every policy and transfer requires careful legal, administrative, and carrier review.

Insurance company failure is possible but uncommon, especially with major, highly rated carriers. Carrier strength matters because the death benefit is paid by the insurance company. Before investing, the carrier's current financial ratings and the terms of the specific policy should be reviewed.

For life settlement investors, tax treatment may differ from that of a traditional life insurance beneficiary. Because the policy was purchased for value, the investor may owe income tax on the gain portion of the death benefit. The taxable amount is generally the death benefit received minus the investor's basis, which may include the purchase price and premiums paid after purchase. Tax treatment varies by ownership and entity structure, and each investor should consult an independent tax adviser.

The answer depends on exactly what the retirement account would own and how the opportunity is structured. Federal tax rules generally prohibit an IRA from investing directly in a life insurance contract. A different analysis may apply to an interest in a separately structured fund or entity. Before any retirement funds are committed, the proposed structure must be approved by the investor's qualified tax or ERISA adviser and accepted by the custodian.

Qualified Roth IRA growth and distributions can receive favorable tax treatment, but that does not determine whether a particular life settlement structure is a permissible Roth IRA investment. The investor, custodian, and qualified tax or ERISA adviser should review the exact asset, ownership structure, and prohibited-transaction rules before funding.

An investor may be able to sell a position before the death benefit is paid. Appel Financial has access to a life settlement marketplace where a policy can be reviewed and marketed to potential buyers. However, an early sale is not guaranteed, there may be no willing buyer, and any available offer may require a substantial discount. Life settlements should be viewed as illiquid, patient capital that may need to remain committed until maturity.

Returns depend on the policy, life expectancy, purchase price, premiums, fees, structure, and actual timing of the insured's death. Some opportunities are designed to target annualized returns in the mid-teens or higher, but a target is not a promise or guarantee. Investors should evaluate the specific offering materials, all fees and premium assumptions, and downside scenarios. If the insured lives longer than projected, returns are reduced because premiums continue. If the insured passes sooner, returns increase.