The company now has a GUARANTEED equity position. The only "risk" is that the company is now responsible for the monthly premiums. If she outlives her life expectancy, the company's overall return would be less. However, the contracts that are purchased are based on actuarial determinations and life expectancy tends to be very accurate.
Guess who purchases many of these contracts other than Buffett? That's right, banks, large equity firms and hedge funds. Almost all of them keep the profits to themselves and that is their right.
However, there are some companies who purchase the contracts and then make them available for retail "participants". Notice I did not say "investors". According to the SEC, these "fractional life settlements" are an "alternative investment" under Regulation D. There are companies out there that guarantee a return of 11-16% BY CONTRACT, AT MATURITY. Due to the regulation, this cannot be quoted as an "annual rate of return" because the TOTAL is paid out at maturity, that is when the person dies. That number is the one and only variable in the equation.
For example, if someone participates with $10k and the life expectancy is 48 months, then the participant receives 44% if the person dies ANY time up to and including the 48 months. The risk is as follows: if the person lives longer, the participants must pay THEIR portion of the monthly premium until death occurs. This amount is paid out of pocket and would reduce the overall return. This seldom happens but must be disclosed up front.
Another reason this "alternative investment" is not well known is because it cannot be advertised to the general public. Interesting and ironic. The SEC also says you have to be an "accredited INVESTOR" to participate even though it is NOT an investment. Interesting again.
And guess what? A google search will quickly find "SCAM" written all over this industry. Does that mean that ALL companies in the business are scams? Of course not. Once again, the individual must do his own due diligence.
One company has a 20-year track record with many satisfied clients. Another was a clear Ponzi. Again, painting with a broad brush can close the door to legitimate opportunities before it is even opened.
So there you go. Further proof that double digit returns ARE indeed possible if you know where to look. In this case, the returns are OUTSIDE of the market as well. No sleepless nights wondering when the markets will correct or crash.
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