Are You TRULY Diversified?
Most people who have an IRA or other account with stocks or mutual funds, think they are diversified.
Others also own real estate, in addition to their stock or bond portfolio...and think they are REALLY diversified.
The fact is, though, while there is diversification of assets, there is not necessarily a diversification of risk. In other words, all of those asset classes are correlated to the markets, and subject to market risk. This includes risk caused by Fed action, geopolitical risk, oil prices, and overreactions to statements or "tweets" by world leaders. Any of these actions can send the value of your investments into free-fall.
If you planned on retiring in 5 or 10 years, and the market dropped 50 percent as it did just a few short years ago, would you be able to retire on time? Or would you have to work an additional 5-10 years while waiting for your investments to recover.
How would you feel if you could place a portion of your portfolio into an asset class that is not correlated to any market or economic events, with no risk of loss due to these events. An asset class that is used as a hedge against that risk by the worlds leading money managers and financial institutions?
Most people who have an IRA or other account with stocks or mutual funds, think they are diversified.
Others also own real estate, in addition to their stock or bond portfolio...and think they are REALLY diversified.
The fact is, though, while there is diversification of assets, there is not necessarily a diversification of risk. In other words, all of those asset classes are correlated to the markets, and subject to market risk. This includes risk caused by Fed action, geopolitical risk, oil prices, and overreactions to statements or "tweets" by world leaders. Any of these actions can send the value of your investments into free-fall.
If you planned on retiring in 5 or 10 years, and the market dropped 50 percent as it did just a few short years ago, would you be able to retire on time? Or would you have to work an additional 5-10 years while waiting for your investments to recover.
How would you feel if you could place a portion of your portfolio into an asset class that is not correlated to any market or economic events, with no risk of loss due to these events. An asset class that is used as a hedge against that risk by the worlds leading money managers and financial institutions?
Welcome to CDAlternative.com, where we specialize in offering our clients safer alternatives to investing their designated safe money into low paying CDs, or risky Stocks, Bonds and Real Estate, which are subject to...potentially severe... market losses.
The products we offer are known as "uncorrelated assets." This simply means that the value of the asset is not connected to...not correlated with...the volatile markets, and cannot be moved by geopolitical events or overreactions to news reports. We offer many alternatives to CDs and market-related products, but our flagship product is the fractional life settlements.
Prudent Financial Solutions has teamed up with West Coast Settlements to offer their Fractional Life Settlements to qualified investors for a predetermined contractual return. Fractional life settlements are a great investment opportunity to hedge against stock market risk with a portion of your portfolio. They can be purchased with non-qualified funds (non retirement accounts) or qualified funds (Retirements Accounts [i.e., IRA, Roth IRA, 401k).
What is a Life Settlement? Thousands of senior citizens who no longer need or want or cannot afford their old policies are looking to sell their life insurance policies for cash. Many use the cash they receive to help pay for end of life and long term care costs, or to supplement their retirement income. When they sell their life insurance policy to an investor or third party for cash, this transaction is called a life settlement. You may have seen advertisements on television from companies who offer to buy these policies.
For Example: Jane is 85 years old. She owns a $1,000,000 life insurance policy that she no longer needs. She has developed chronic health problems, and now needs nursing care. Jane decides to sell her life insurance policy to an investor, instead of continuing to pay for it. She will then use the cash to pay for her long term care costs. The investor maintains the policy, and receives the payout when Jane eventually passes away.
What is a Fractional Life Settlement? For decades, only ultra-wealthy and institutional investors (Warren Buffett, big banks, investment companies, etc.) could afford to buy life settlements. However, in 2003 the state of California introduced Senate Bill 1837 which allows the average investor to purchase a fraction of a life settlement. Rather than one wealthy investor purchasing an entire insurance policy, now the average investor can own a small portion of that policy - a fractional life settlement, which we bundle into a portfolio of portions of multiple policies.
The Buying Process
Step 1: Investor decides to use non-qualified funds (cash) or qualified funds (a retirement account) to purchase a pool of fractional life settlements.
Step 2: An independent trust company, receives those funds. Prudent Financial Solutions and West Coast Settlements never touch your money.
Step 3: The Trust company issues certificates of ownership to the investor.
Step 4: A portion of the invested money is transferred into the 'premium reserve account'. This reserve account pays the premiums for the policies if necessary.
Step 5: When a policy matures, the insurance carrier pays the claim to the Trust.
Step 6: The Trust then pays the investor their share of the proceeds.
Since 2003 several life settlement companies have been offering this product here in California. However, the way many of these companies structured their investment left their clients exposed to unnecessary risks and additional out of pocket costs.
The Old Way: Many of these companies would place your funds in one or multiple policies and put a portion of those funds into a “premium reserve account”. The premium reserve account would pay the premiums (cost of insurance) through the insured’s life expectancy. If the insured lived beyond life expectancy the premium reserve account would become depleted, meaning investors now had to immediately pay out of pocket for the premiums. If a case matured early, the life settlement company would pocket those funds as added profit.
The West Coast Settlements Way: West Coast Settlements has reduced the chance that you will pay out of pocket for a premium call. Investors purchase fractional life settlements from West Coast Settlements as a pool of (usually 5 - 10) policies; the investor owns a portion of each policy. A premium reserve account serves the entire pool. If a policy goes longer than expected, premium reserve funds protecting the remaining policies are used as a back-up plan to pay that policy's additional premiums. Therefore, the investor doesn’t come out of pocket for the premium call. Then, when the policy matures, a portion of the investor's return is reimbursed back to the premium reserve account to help pay for future premiums for the remaining policies in the pool, in the event they should run long. When the final policy in the pool matures, and there are funds left over in the premium reserve account, those funds are returned to the investor. Unlike many other life settlement companies, West Coast Settlements doesn’t pocket those funds - they belong to you!
What are the returns? Your return can be calculated one of two ways: as an overall return, or as an annual rate of return (APR). Until a policy matures you can't really estimate your APR. This is why we prefer to show clients their overall return. Before marketing a policy, we typically fix the overall return according to how many months the insured is expected to live. On average, though, it is reasonable to expect your funds to double every 7-10 years.
Example:
An 80 year old male is expected to live 5 years - 60 months. We would show an overall return of 60%. In this case, if an investor had $100,000 invested in this policy, they would receive $160,000 when the policy matures. Once the policy matures the investor can figure out exactly their annual rate of return (APR). The sooner the policy matures the higher the APR; the longer it takes to mature the lower the APR. In simple, non-compounded terms, if this policy matured in exactly 5 years, the average annual return would be 12%. If life expectancy were exceeded by 5 years, the annual return would still be 6%. Since the investor is not just investing in one policy but, rather, a portfolio of 5 or 6, the longevity risk is spread out...generally, one third will mature early, one third will mature roughly on time, and one third will run long. We expect complete portfolios to average 7-10%+ annually. These returns are comparable with the long term returns of the stock market, without the risk of sudden and severe losses.
One of the biggest decisions an investor makes is whether to fund an investment in life settlements with non-qualified funds (cash) or qualified funds (IRA/Roth IRA/401k/etc.).
Cash: Investors who want to use cash must make sure that those funds won't soon be needed. Life Settlements are an illiquid investment, meaning you can’t withdraw any funds until a policy matures. Usually, your money will be invested for several years. So, while a policy could mature very soon, investors with cash need to be sure to only use funds they don’t foresee needing for several years. Each portfolio contains several policies, and as each policy matures, you have the option of receiving a cash payout, or reinvesting those funds.
Retirement Account: Retirement accounts, especially Roth IRAs, are especially well suited to Life Settlements because most people don’t plan on accessing these accounts for several years, fitting very well with this investment's anticipated timeline. And, life settlement payouts within a retirement account will see no immediate tax implications, so funds are able to continue to grow tax deferred or tax free (Roth IRA). Unlike many of our competitors, we will pay any IRA trustee fees associated with this investment for two years per $25,000 invested.
Frequently Asked Questions
Isn't it morbid to profit from someone's death?
The policies West Coast Settlements buys are sold to them by people who no longer have a need for the policy, or who can no longer afford the payments on the policy. This ranges from business owners with multi million dollar policies who have sold their business and no longer have a need for coverage, to elderly seniors who can no longer afford the premiums and no longer need the protection. Rather than allowing the policy to lapse, where the senior receiving nothing, we are providing them with a cash benefit for their asset. Some people use the proceeds to fund medical or long term care bills, while others use it to improve their quality of life. Everyone wins!
What is the minimum investment into Fractional Life Settlements?
$25,000 for a Cash/Non-qualified Investment,
$25,000 for a IRA/Qualified Investment
What costs are associated with West Coast Settlements Fractional Life Settlements?
If you invest with cash, the only cost occurs in the event there is a premium call and in the unlikely event the premium reserve account is depleted. At West Coast Settlements, we keep investor costs to a minimum; that is why we have gone beyond other companies by structuring a pooled premium reserve account to reduce the chance you ever pay out of pocket.
If you invest with a retirement account, we will pay any fees associated with your account and this investment for two years per $25,000 invested. This is not the case when investing with other companies, and will increase your return when you invest with us.
Why do you use a Trustee?
First Western is an independent trust company that oversees our life settlement portfolios. This is the safest way to protect investors’ funds. The trustee is a national bank and holds the policies and funds in a statutory trust. This ensures that in the unlikely event West Coast Settlements ever filed bankruptcy, creditors wouldn’t be able to access investor funds in the portfolio accounts.
Which IRA Provider Do You Use?
When you invest with your retirement funds West Coast will help you set up a "self directed IRA”. We prefer to use The IRA Club (IRAClub.org). They have low rates and easy online access. If you already have a self directed IRA with another provider we can work with them instead. If you have a retirement account with a traditional institution, we can assist with the transfer of funds to your new self directed IRA. We cover all costs associated with the transfer or account set up. Your transfer will be tax deferred, meaning you will not pay any taxes for moving your money into the new account...and if it is a ROTH IRA, growth will be tax free.
What are the risks?
As with any investment there are risks associated with investing in life settlements. However, West Coast Settlements has taken steps to reduce those potential risks. The primary risk facing the investor is longevity; that is, the life expectancy of an insured of an owned life settlement. The industry standard is to order life expectancy reports from medical experts to determine the insured’s life expectancy. While those reports are usually accurate, there are no guarantees that the policy will mature "on time." When a policy goes beyond life expectancy the premium reserve may become depleted. While we have not had this occur, this means premium calls can occur which will reduce your return on the investment. In the most extreme theoretical case, an insured could live so far beyond life expectancy that an investor could lose principal. While theoretically possible, West Coast Settlements has never had a client lose any principal investing in life settlements.
How is the life expectancy determined?*
Before a life settlement company purchases a policy it hires a life expectancy company to determine how long the insured is expected to live. Life expectancy companies are comprised of doctors who typically review more than 200 pages of documents to determine the insured’s anticipated life expectancy. These documents include medical records, family history, past life insurance applications, and actuarial tables. These reports are available to you upon request.
Is this legal?
Yes. For over a hundred years people have been selling their life insurance policies for a cash settlement. In 1911 the Supreme Court ruled in Grigsby v. Russell that selling and buying a “life settlement” is a legal transaction, no different than selling or buying any other asset.
Are life settlements the same as viaticals?
Though life settlements and viaticals may seem similar, there are some distinct differences.
Life settlements deal with senior citizens who sell off their policies. Their life expectancies are usually between 3-10 years, and the insured usually suffers from some type of chronic illness which, combined with their age, can reduce their life expectancy.
With viaticals, on the other hand, the insured selling his or her policy is facing a life threatening illness and has less than a 2 year life expectancy. Most insureds are younger - 30-60 years old. With the progress of modern medicine, some of these people are cured of their illness and the cases can go on for decades.
Viaticals often have greater risk due to the insured's age, and potential medical advances. With life settlements, the insured's age plays a major role in ensuring that the policy does not go on for an extended period of time.
*Life expectancy estimates are not 100% accurate and there’s no guarantee the insured will pass away on an exact date. Investors must realize there is a possibility some or all of their policies could go past life expectancy, thus lowering their overall return. West Coast Settlements are only available to Qualified Investors in the State of CA.
Products offered by Prudent Financial Solutions Insurance Services
CA Lic#0746129