Incorporating Life Settlements and Private Debt in Financial Plans

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As more and more advisors come to understand the compelling investment case for dedicating a portion of client portfolios to life settlements (the short answer: double-digit targeted returns that are largely uncorrelated with financial markets at a time when many investors are looking to diversify), the inevitable next question is where those assets fit in a portfolio allocation framework. Previously the exclusive province of large institutions, life settlements are increasingly accessible to qualified individual investors. But for advisors to help their clients take advantage of these and other private debt opportunities, they first need to understand how to characterize them in the context of a financial plan.

Practices vary, with some financial planners placing life settlement investments into a “general alternatives,” or “alternative fixed income” bucket, or even a hedge fund allocation, while others assign them to the insurance linked securities sleeve that might also include catastrophe bonds. That may make sense in some contexts, but because of their return profile and because the underlying policies are a contractual repayment obligation, life settlements are most accurately characterized as private credit. Private credit is defined by Cambridge Associates as a sub-category of private debt that excludes investment-grade and high-yield bonds. Alternative investments like life settlements may address the inefficiencies of traditional investments (such as high volatility, low interest rates, benchmarking, etc.). Therefore, they fit outside or in between traditional allocations.

Understanding why life settlement investments best fit into the private credit allocation can help advisors and their clients better understand the unique and compelling characteristics of these assets and is worth exploring in greater detail.