Risk Associated With Investing in Life Settlements

Is there a risk associated with investing in life settlements? Most often, these transactions benefit both parties involved. And everyone walks away happy.

Sellers are relieved from monthly premium payments and receive a lump sum in exchange for ownership of their life insurance policy.

The buyer receives a return based on how much longer the insured individual lives. A recent report by the Wall Street Journal indicated the fraud risk inherent in this investment, as doctors, policyholders and settlements providers and brokers may deceive buyers.

“Among the reasons a life insurance policy could be declared invalid: The insured lied about his health on the application, or obtained the policy with the intention of selling it in a life settlement,” the report said.

If the policyholder exceeds his or her life expectancy, investors are also responsible for paying premiums. The risk is smaller for those buying into a pool of life settlements, according to the report, because a significant number of individuals would have to exceed their life expectancies before overall rates rise.

This, however, puts investors at the mercy of their peers: If one investor neglects to pay premiums, expenses for all the others go up.

Many critics of life settlements dislike the idea of benefiting from another person’s death. They are also significantly more expensive than many other investment opportunities available to individuals.

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