Life Settlement Funds
What are Life Settlement Funds?
Life settlement funds represent an alternative asset class that seeks diversification and potentially higher returns outside of traditional asset classes like stocks and bonds. Here's a detailed look at the pros and cons of investing in life settlement funds:
Pros:
1. Diversification: Life settlement funds offer credit unions a way to diversify their investment portfolios beyond traditional asset classes like stocks and bonds. Adding alternative investments like life settlements can help spread risk and potentially enhance overall portfolio performance.
2. Potential for Stable Returns: Life settlement investments can provide relatively stable returns over the long term, as they are typically not directly correlated with stock market fluctuations or interest rate changes. This stability can be beneficial for credit unions looking to generate consistent returns to support their operations and member services.
3. Liability Matching: Investing in life settlement funds can help credit unions match the duration of their investments with the duration of their liabilities, such as employee benefits. Since life settlement investments typically have a long-term horizon, they may align well with the long-term nature of credit union liabilities.
4. Non-Interest Rate Sensitive: Life settlement investments are generally not sensitive to changes in interest rates, making them less susceptible to the impact of monetary policy decisions by central banks. This can be advantageous for credit unions managing interest rate risk in their investment portfolios.
Cons:
1. Credit Risk: Credit risk is the risk that the counterparty to a financial instrument will fail to release an obligation. With life settlement funds, the insurance carrier represents the primary concentration of credit risk. To mitigate this risk, funds typically seek to purchase policies issued by highly rated life insurance companies.
2. Liquidity Risk: Life settlement funds typically have a long investment horizon, as returns are either realized upon the death of the insured or have a stated maturity date. This lack of liquidity may be a concern for credit unions needing access to their funds in the short term to meet operational or member needs.
3. Longevity Risk: There is a risk that the insured individuals may outlive their life expectancies, resulting in lower returns or losses on the investment.
4. Complexity and Due Diligence: Investing in life settlement funds requires thorough due diligence to assess the underlying risks and potential returns. Credit unions must carefully evaluate the risks and benefits of investing in life settlement funds and may need to seek guidance from investment professionals or consultants.
Before investing in life settlement funds, credit unions should carefully weigh the pros and cons and consider factors such as their risk tolerance, investment objectives, and regulatory requirements. Consulting with legal and financial advisors who specialize in alternative investments can help credit unions make informed decisions about incorporating life settlement funds into their investment strategies.
