Warren Buffett Life Settlements

There are investment decisions that are alternatives to investing in the stock market, mutual funds or Real Estate Investment Trusts (REITs). REITs are securities and not property and investing in precious metals would be through mutual funds.

Life insurance values are a function of actuarial math even though Life Insurance companies portfolios will contain stocks, bonds and fixed annuities. In 2009, the stock market crash did not cause a loss of value of permanent life insurance policies. As as a result, investors have found that life insurance is an attractive investment and became part of its investment diversification strategy.

Generally, not only does permanent life insurance hold its value relative to other investment products, there is growth in cash value with a higher return rate than on bonds. On the other hand, the value of a permanent insurance policy will be affected by the strength of the insurance company’s investments.

For instance, those companies that have invested in mortgage-related securities that have lost value, the credit rating of the insurance company may be downgraded. Insurance companies, as an investment strategy, will limit their risk by avoiding residential mortgage-backed securities (RMBS).

While permanent life insurance is not classified as an investment, there is at a product referred to as a life-insurance based investment. Major financial corporations, including hedge funds and experienced, knowledgeable investors see the advantage in treating permanent life insurance as an investment.

These investors created an investor product referred to as life settlements (aka senior settlements) which are treated as assets that can be sold. The policy owner sells his life insurance for a lump sum payment, thus exchanging a death benefit for a living benefit. The payment is less than its death benefit value but exceeds its cash surrender value.

Warren Buffett controls Berkshire Hathaway Life Insurance Company and purchased a life settlement portfolio for $300 million.

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