Playbook #042: Viatical Insurance Settlements

🖼️ The Big Picture

At first glance, viatical insurance settlements seem a bit morbid. You’re buying the life insurance payout of someone who’s critically ill, and the sooner they die the better your returns are.

However, once you dig into this, you realize it’s actually a win-win. It’s the “less money now vs. more money later” logic that’s used when you’re selling anything from a house to a watch, and it’s just the way things work based on the time value of money.

You’re helping someone who’s critically ill - and needs or wants money now get up to 3x more money than they would by surrendering the policy back to their insurance provider.

Here’s how it works:

Let’s say John Smith has a $1,000,000 life insurance policy. Unfortunately, he was diagnosed with a critical condition, and doctors gave him a timeline of about 2 years.

John doesn’t have any dependents, so he’s not worried about passing anything on. Might as well enjoy the money now, he figures. He reaches out to his life insurance company, but they’re only willing to give him $200,000. A settlement broker, however, offered him $600,000.

The buyer takes over John’s policy, including the monthly payments. And upon his death, the buyer receives the death benefit payout.

For investors, viatical settlements have no correlation to other markets, making them a great way to reduce volatility in a portfolio.

Warren Buffett and Berkshire Hathaway have invested hundreds of millions into these kinds of policies. In fact, they like it so much they started their own company to buy them, Berkshire Settlements. Bill Gates is another notable investor in this space.

Because they’re highly regulated transactions, you have to be an accredited investor to participate. But even if you’re not accredited, these are well worth understanding as they’re definitively in the category of “alternative investments,” and not many traditional financial advisors understand or will recommend them.

🔢 By The Numbers

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