Investing in US life settlements involves investors buying life insurance policies from people in the US at more than their cash surrender values. Policyholders are usually at least age 65, with various health problems or a disease that means their life expectancy is typically between two and 10 years. Investors who buy the policies pay the premiums and become the beneficiary when the policy matures on death of the original policyholder.
The Mosaic cascade portfolio allows investors to create bespoke and diverse portfolios of policies to produce target annual returns of 9 to 12 per cent that are uncorrelated to traditional asset classes. PDL international says premiums for policies can be high, so investors’ money is pooled to pay premiums. This enables investors to have a diverse portfolio of fractions of 10 to 20 policies with different maturity dates, rather than just one or two whole policies.
PDL says transparency, charges and illiquidy have been issues for the asset class. It says its investors will be provided with lists of all the policies in their portfolio and that as a bespoke portfolio rather than a fund, the cost structure is inherently lower, with no performance fee. Its bespoke nature allows investors to manage liquidity through the maturity dates of the policies in their portfolios, perhaps to create a regular income stream.
Longevity risk is diversified by holding policies of varying maturities and by some people dying earlier than expected. There are also two extra cushions. Investors’ money isplaced in an escrow account to pay premiums for an extra year after life expectancy and 3 per cent of investors’ portfolios is held in cash to pay the premiums of policies if life expectancy goes beyond an additional year. This is topped up at each maturity.
This product may be seen as a step in the right direction following the FSA’s concerns about traded life settlements earlier this year, but some IFAs may prefer to give clients exposure to the asset class through multi-asset multi-manager funds.