
Life Settlements as an Investment Asset Class
How life settlements offer institutional investors actuarial returns, low correlation, and structural diversification in today’s evolving market.
7 min read | Oct 20, 2025
Life settlements—the purchase of life insurance policies from original holders—have gained traction as a niche alternative asset class offering actuarially driven returns and structural diversification. Institutional investors, including pension funds, endowments, and family offices, are increasingly allocating to life settlements for their attractive risk-adjusted yields (historically ~8–12% IRRs) and minimal correlation to traditional markets.
Performance is largely independent of economic cycles, driven instead by mortality and policy cash flows, making the asset class particularly resilient in volatile or low-yield environments. In 2023, investors acquired approximately 3,400 policies totaling $4.5 billion in face value—still a fraction of the $200+ billion in eligible policy supply. As data quality, regulatory frameworks, and manager specialization improve, life settlements are entering a phase of deeper institutional adoption.
Source: South Sigma
What Are Life Settlements?
A life settlement involves selling an in-force life insurance policy to a third-party investor. The transaction delivers the seller a lump sum greater than the policy’s cash surrender value but less than the death benefit. The investor assumes ownership, continues premium payments, and collects the death benefit upon the insured’s passing. Sellers are typically seniors over 65 with policies exceeding $100,000 in face value. Motivations include unaffordable premiums, liquidity needs, or revised estate planning. Investors gain exposure to mortality-linked cash flows, buying future death benefits at a discount.
When surveyed about the reasons their firms invest in life settlements, capital allocators responded in 2024 as illustrated in the below chart:
Source: The ELSA/Conning 2024 Survey
Returns are contingent on life expectancy (LE) assumptions, servicing quality, and premium costs. It is critical to distinguish life settlements from viatical settlements, which involve terminally ill individuals with life expectancies under two years. Life settlements involve longer durations and more stable underwriting assumptions. Legally validated by Grigsby v. Russell (1911), policies are now transferable assets, traded with the aid of licensed brokers, providers, and institutional buyers.
Where They Sit in the Investment Spectrum
Life settlements occupy a distinctive position across institutional portfolios. Their hybrid nature blends characteristics from actuarial instruments, private credit, and structured products, making them highly adaptable to different allocation frameworks. This versatility provides allocators with multiple integration pathways, tailored to risk, liquidity, and income mandates.
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Alternatives: Part of the "actuarial alternatives" cluster alongside insurance-linked securities (ILS), catastrophe bonds, and longevity swaps.
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Private Credit Adjacent: Shares attributes with specialty finance—illiquid, non-marketable cash flows, idiosyncratic risk drivers, and reliance on underwriting.
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Structured Income: For some, life settlements resemble long-duration, non-correlated structured credit.
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Portfolio Role: Low correlation, return predictability, and resilience in drawdowns position life settlements as stabilizers within alternatives.
They sit well within income or diversifier sleeves and can be accessed through closed-end funds, securitized structures, or separately managed accounts. As a result, they provide flexibility in tailoring exposure to institutional constraints and objectives.
Source: South Sigma
Why Institutions Care
Life settlements offer structural diversification in portfolios constrained by traditional yield sources. Their return profile is largely immune to equity volatility, interest rate cycles, or credit spreads. The primary driver—human mortality—is idiosyncratic and measurable. This quality makes life settlements attractive to:
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Pension funds seeking liability-aligned, long-duration assets.
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Family offices targeting steady uncorrelated income.
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Endowments with long horizons and appetite for illiquidity.
In 2023, ~3,400 policies totaling $5 billion in face value transacted—a fraction of the $200+ billion addressable market. The gap suggests inefficiencies and first-mover advantages for disciplined allocators.
Which Hedge Funds Use Them—and How
Institutional investors access life settlements through various manager archetypes. While structures differ, the commonality lies in converting longevity exposure into durable, actuarially priced returns. These approaches vary by sophistication, access, and the investor’s tolerance for operational complexity.
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Specialist Funds: Pure-play managers originate, underwrite, and service portfolios. Strategies focus on diversification by carrier, age, LE range, and policy type.
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Multi-Strats: Hedge funds with insurance-linked desks allocate tactically, often via structured pools or co-investments.
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Credit/Structured Product Funds: Acquire life settlement-backed notes for yield pickup or relative value vs. ABS/CLOs.
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Re/insurer-Adjacent Capital: Family offices and reinsurers anchor fund platforms or engage in co-investment.
Implementation includes direct policy acquisition, pooled funds, or secondary trades. Financing, premium optimization, and LE modeling differentiate strategy execution.
Risk Drivers and Mitigations
Life settlements contain idiosyncratic and structural risks that require rigorous governance. These risks are not market-driven but originate from longevity assumptions, legal enforceability, and servicing reliability. A robust framework can substantially mitigate downside exposure and preserve return consistency.
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Longevity Risk: Returns degrade if insureds live longer than expected. Mitigated via LE provider triangulation and reserve buffers.
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Servicing Risk: Poor execution in premium payments or documentation can invalidate policies. Institutional servicers and audit trails are essential.
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Legal Risk: Policy contestability, carrier disputes, or incomplete transfer chains can impair outcomes.
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Valuation Risk: Discount rates, LE drift, and cost-of-capital assumptions must be periodically updated.
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Liquidity Risk: Illiquidity requires careful pacing, diversification, and vehicle structure alignment.
Risk-adjusted returns depend on underwriting discipline, servicing quality, and transparent governance. Institutional managers with long track records and verified controls offer meaningful differentiation.
Portfolio Construction and Sizing
Life settlements function as income-generating diversifiers within alternatives allocations. Sizing typically ranges from 2–5% of an alternatives sleeve depending on liquidity profile and vehicle type. Key considerations include:
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Fund Structure: Closed-end, evergreen with gates, or securitized tranches.
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Duration Alignment: Laddered portfolios mitigate concentration risk and align with liabilities.
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LE Sensitivity Analysis: Portfolio robustness tested under LE extension scenarios.
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Diversification: By policy size, carrier, age, gender, and LE cohort.
Stress-tested portfolios can reduce drawdown volatility and improve Sharpe ratios without adding market beta. When properly constructed, life settlements offer a complementary exposure to traditional and alternative income sources.
Source: South Sigma
Market Evolution and Institutionalization
What began as a fragmented secondary market has institutionalized over the last decade. The shift is marked by the emergence of standardized practices, robust underwriting data, and greater transparency in policy servicing. These developments reduce friction and increase appeal to long-horizon allocators.
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Standardization: Policy documentation, servicing protocols, and audit practices have matured.
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Data Quality: LE tables, medical data analytics, and mortality modeling are more robust.
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Secondary Liquidity: Securitized pools and tertiary market trades offer optionality, though still limited.
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Regulatory Oversight: U.S. state-level licensing of providers and brokers has improved counterparty quality.
As more capital enters with disciplined governance frameworks, life settlements are transitioning from niche to structured product territory. The entry of institutional sponsors is accelerating the pace of normalization.
A Governance-First Perspective
Institutional allocators must apply governance rigor akin to private credit or ILS. Without proper controls, the unique benefits of the asset class can quickly erode under operational missteps. A strong governance framework ensures risk clarity and protects long-term return integrity.
Core practices include:
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Underwriting Discipline: Multi-provider LE inputs, model calibration, and vintage diversification.
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Servicing Standards: Independent servicing, premium optimization protocols, and monthly reconciliations.
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Monitoring: Scenario analysis, stress testing, and performance attribution (yield vs. LE variance).
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Legal Chain-of-Title: Verified documentation and contestability buffers.
These practices are not optional; they define institutional readiness. Allocators evaluating platforms should treat governance standards as a primary underwriting factor.
Conclusion
As yield compression and market volatility challenge traditional portfolio construction, life settlements present a compelling, actuarially grounded alternative. For institutional investors with long horizons and robust governance, they offer uncorrelated returns, resilience in drawdowns, and access to a deep, underutilized market. But unlocking their full potential demands underwriting discipline, operational rigor, and manager specialization.
As the asset class continues to institutionalize, early movers who embed life settlements thoughtfully into their portfolios may gain a durable edge in an increasingly crowded alternatives landscape.