Life settlement case study: Man sells $1.5 million policy for $430,000 to beat market odds

Frank, an auditor at a major railroad, has sold two life insurance policies with a combined death benefit of $1.5 million for a net payout of $430,000. The transaction, known as a life settlement, allows policyholders to sell their policies to third parties for more than the cash surrender value but less than the full death benefit. Frank, who was diagnosed with a rare stage 4 lung cancer, intends to invest the proceeds to generate a return that exceeds the amount his family would have received had he kept the policies.

The decision to sell was driven by Frank’s desire to convert a future liability into immediate capital. He had purchased the policies before his diagnosis and subsequently placed his cancer into remission with medication. By selling the policies, Frank’s wife signed away her rights as the beneficiary, and the ownership of the policies, along with the responsibility for future premiums, transferred to the buyer. Frank stated that he was effectively rooting against his own health during the bidding process, as a shorter life expectancy would have resulted in a higher payout for the buyer.

The sale was facilitated by the broker Evergreen Settlements, which ran an auction after Frank declined a direct offer of $200,000 from a buyer who did not request his medical records. The winning bid came from a buyer identified as Coventry, offering $470,000. After deducting a $40,000 fee to the broker, Frank received $430,000. This amount represents more than 20 times the approximately $20,000 he had paid in premiums over the life of the policies.

Frank’s investment strategy requires the $430,000 to grow to over $1.5 million before his death. According to his own calculations, this necessitates an annual return of 12% over a 12-year period. While the strategy carries significant market risk, Frank has not yet deployed the full capital into the market. A portion of the proceeds has been used for personal expenses, including the purchase of a 20-year-old BMW and a family trip to Costa Rica.

Life settlements have been legal in the United States since a 1911 Supreme Court ruling by Justice Oliver Wendell Holmes, which affirmed that life policies possess the ordinary characteristics of property. The practice saw limited use until the 1990s, when it gained traction during the AIDS crisis as individuals sought immediate cash flow. According to the Life Insurance Settlement Association (LISA), outside buyers typically offer significantly more than insurers for policy cancellations. Last year, the average offer from insurers was $24,360, compared to an average of $212,066 from outside buyers.

The U.S. Government Accountability Office (GAO) has noted that some individuals close life settlement deals without fully understanding the terms or associated broker fees. Frank’s case highlights the potential for higher returns through broker-run auctions, where multiple bidders assess the insured’s life expectancy to determine the price. However, the strategy relies on the seller outliving the investment horizon and achieving consistent high returns, a challenge that few investors can guarantee.