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How to Select a Life Settlement Fund

How to Select a Life Settlement Fund – by Jose Garcia, Carlisle Management Company CEO

 “As the opportunities to invest within the Life Settlement arena continue to expand this growing asset class is gaining more exposure for its strong performance and low correlation to traditional markets.  When selecting your Life Settlement Fund, here are some important areas to consider before making the decision to investment.” 

Among the key points to consider Jose Garcia’s identifies the following four key points: avoid Life Settlement Funds with high sales loads, selecting a domicile with a double taxation treaty, understand the funds liquidity procedures, and how the Fund determines life expectancies.

Avoid Life Settlement Funds with High Sales Loads

Some Life Settlement Funds charge what is known as a front load or sales commission.  The fee can range between 2-10 % of the investment amount, the fee or commission is paid to the person or entity that sells the fund product to the investor.  While many advisors inform their clients of fees it is always good practice to ask for in writing exactly what fees are being paid as front loads and or sales commissions, and how those fees are accounted for in the fund’s value.  An overly aggressive sales force or high commission structure may be good for the financial representative but ultimately will impact the fund’s performance and overall asset value and integrity.

Selecting a Domicile with a Double Taxation Treaty

In 2009 the United States Internal Revenue Service published two tax clarifications addressing how buyers and sellers of in-force life policies should treat transactions.  As a result the longevity investment community put more attention on the tax ramifications of investing within Life Settlement Funds.  Not all Life Settlement Funds operating internationally are domiciled in countries like Luxembourg or Ireland that can take advantage of double taxation treaties with the United States.  The tax ruling states that if an investor resides in a country without a double taxation treaty with the United States, the investment within life settlements is liable for a 30% withholding tax which in turn will cause the investor to file a tax return and pay a 35% corporate income tax over the profits of that investment.  In addition the investment vehicle must be deemed transparent in order to claim benefits if your country of domicile has a double income tax treaty.  It is very important that you ensure that your life settlement fund is structured in a way that you can utilize your tax treaty benefits with the US, and that such fund is not polluted by having investors that cannot claim treaty benefits, this could put your investment at risk.  If you are an investor in a country that has a double income tax treaty with US, investing through a transparent vehicle in Dublin or Luxembourg is always the safe choice.  Demand a third party opinion of this in writing.

Understand the Funds liquidity procedures

A life settlement fund requires ongoing liquidity in order to meet expenses, insurance premiums and potential redemptions.  Funds utilize a number of approaches, often times a liquidity facility that is managed by the manager or have access to other non-policy liquid assets.  Some funds utilize a credit facility or lending arrangement with banking institutions that often have strict repayment requirements. Understand the difference and circumstances in which those facilities can be accessed.  While no two funds are structured similarly many have access to these facilities when cash levels hit a predetermined level and trigger credit/lending lines.  Be familiar with the fund’s cash management policies, and what the potential effects are to your investment performance of these procedures.

How does the fund determine life expectancies?

In a portfolio, fund managers deal with improving mortality and as a result increased life expectancies on a constant basis.  First an investor must inquire as to how the fund determines a life expectancy profile for each life insurance policy it sources.  Life expectancies are typically conducted by actuaries in independent life expectancy firms.  The standard practice for life settlement funds is to utilize multiple life expectancies in order to minimize dependence in any one underwriter.  Multiple life expectancies provide increased insight and more information for the managers to make an accurate purchase decision.  Investors should request information about the life expectancy underwriters and understand how the process is calculated, as mortality is the underlying asset in which you are investing.

Jose Garcia CEO of Carlisle Management Co. summed up 10 key points for selecting a Life Settlement Fund.


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