Over the past decade, life settlements hedge funds have steadily gained acceptance among institutional investors. Their appeal lies in the potential to deliver attractive double-digit returns while maintaining low volatility and a high Sharpe ratio. Just as importantly, the strategy offers meaningful portfolio diversification, given its historically low correlation to private credit risks and broader capital markets.
At the 2025 Gaining the Edge Global Cap Intro event, one of the largest cap intro events in the alternative investment industry, there was a significant increase in the number of investors interested in life settlements. Out of hundreds of alternative investment funds that participated in the event, a life settlements manager had the third highest number of meetings with investors.
This paper explores the growing attractiveness of life settlements as an investment strategy. It provides an overview of the strategy’s fundamentals, highlights the social benefits to policyholders, and examines the role of longevity risk in shaping outcomes. In addition, it analyzes how leading fund managers enhance returns and generate alpha through specialized expertise, and concludes with the strategic benefits to institutional allocators who incorporate life settlements into their portfolio.
1. Life Settlements Overview and Social Benefits
The U.S. life insurance market has more than $22 trillion in in-force policies with an estimated 88% of all life policies lapsing prior to claim. These policies lapse because of financial hardship or because the policyholder’s circumstances have changed, leaving them unable or unwilling to continue premium payments. Despite building up significant value in these policies, less than 1% are sold to third parties. In order to enhance the sale of life policies, 43 US states have comprehensive life settlement laws and regulations. Life settlements provide a social benefit by giving senior citizens access to the value of their policies. Instead of surrendering a policy for a nominal amount, or worse, letting it lapse with no return, policyholders can realize a fair market value, often generating a meaningful source of liquidity at a time when it is most needed.
As an illustration, consider an individual who purchased a life insurance policy in their 20s or 30s, with the goal of protecting their spouse and children in the event of an untimely death. By the time this individual reaches their mid-70s, their circumstances may look very different. They might now rely primarily on Social Security income, making it difficult to continue paying premiums. At the same time, their children may be financially independent, and in some cases, their spouse may have already passed away.
In such a situation, the original purpose of the policy no longer applies, yet the policyholder has often built up significant value in the contract. A life settlement transaction allows the individual to sell the policy for potentially hundreds of thousands of dollars. This liquidity can meaningfully enhance their quality of life in retirement, providing financial flexibility and security during their later years.
Life settlements offer a price which is often 5-6x greater than the surrender value, benefiting policy holders, yet also below the intrinsic value, which provides returns for the life settlements investor. After purchasing the policy, the life settlements firm is responsible for paying future premiums and will eventually receive the death benefit associated with the policy. This structure transforms a policy at risk of lapsing into a mutually beneficial transaction: policyholders unlock value today, while investors capture long-term returns.
2. Longevity Risk
Longevity risk refers to the risk that an individual lives longer than anticipated based on actuarial assumptions. This risk plays a critical role across multiple sectors of the financial system, most notably in pensions, insurance, and life settlements.
Longevity risk has historically been one of the most significant risks faced by defined benefit pension funds. When beneficiaries live longer than actuarial projections, pension plans are required to make higher lifetime payouts, which can result in funding shortfalls. Conversely, if beneficiaries pass away earlier than expected, the plan sponsor realizes a financial gain as obligations are reduced.
In addition to pension funds, longevity risk is also embedded within life insurance companies through their issuance of life annuities. For these products, the insurer assumes the risk of paying beneficiaries for as long as they live. In this case, if an annuitant dies earlier than expected, the insurer benefits by discontinuing payments sooner, thereby reducing its liability. Conversely, if the annuitant lives well beyond expectations, the insurer faces extended payment obligations that can erode profitability.
For life settlement funds, longevity risk is managed differently. Because fund performance depends on the timing of death benefits, accurate estimation of life expectancy is crucial. Leading managers mitigate this risk through rigorous underwriting of each policy, the use of specialized medical and actuarial analytics, and maintaining diversification across a broad pool of policies. Additionally, many funds structure their portfolios with a relatively short average duration, which helps limit exposure to extreme longevity outcomes and supports more predictable cash flow profiles.
3. How do life settlement managers add value?
A diversified portfolio of life settlements has typically generated high risk adjusted returns, and this can be enhanced via active management by top life settlements firms. The steps to enhance value include sourcing, underwriting, and actively managing the portfolio.
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- Sourcing policies: Utilization of broad supply channels provides access to the widest range of policies to identify the subset that have the best possible prices. This includes both sourcing policies from regulated providers or from other life settlement fund managers. The liquidity of the life settlements market varies over time. There is the potential to purchase competitor portfolios at significant discounts to enhance the portfolio returns.
- Underwriting / pricing policies: Leading life settlement firms apply sophisticated models to industry mortality forecasts to enhance returns. These models factor in many variables including third party life expectancy assumptions from health records, adverse selection, credit quality of insurance companies, size of policy, among others.
- Ongoing and active management of the portfolio: Managers can build out diversified portfolios based on insurance company provider, age of insured, location, and health issues. They also monitor the portfolio for liquidity needs and sell policies to other life settlement managers that have lower expected returns than new opportunities.
4. Benefits to Allocating
With equity valuations near all-time highs and many private market strategies taking on increased risk, institutional investors are actively seeking alternatives that can provide attractive returns with differentiated sources of risk. Life settlements offer a compelling solution, as many diversified portfolios of policies have generated double-digit returns with relatively low volatility. Because returns are primarily driven by longevity outcomes rather than economic or market cycles, the strategy has exhibited low correlation to other asset classes, making it a powerful portfolio diversifier in periods of market uncertainty.
As an added benefit, insurance liabilities, including life policies, rank above insurance company commitments to equity and bondholders. The collection of the policy proceeds upon maturity is very secure; hence why life settlements have a very attractive risk-return ratio when compared to an insurance company’s bonds.
Beyond these financial benefits, life settlements also deliver a social benefit, enabling seniors to unlock meaningful liquidity from policies that would otherwise lapse or be surrendered at minimal value. For institutional allocators, this rare combination of diversified returns, capital protection, and social benefit makes life settlements an increasingly attractive addition to an alternative investment portfolio.
Donald A. Steinbrugge, CFA – Founder and CEO, Agecroft Partners
Don is the Founder and CEO of Agecroft Partners, a global hedge fund consulting and marketing firm. Hedgeweek and/or HFM have selected Agecroft Partners 13 years in a row as the Hedge Fund Marketing Firm of the Year.
He has spoken at over 100 Alternative Investment conferences, been quoted in hundreds of articles relative to the hedge fund industry, has done over 100 interviews on business television and radio and has over 35,000 subscribers to his Hedge Fund Industry Insights Newsletter.
Don is also the Founder of Gaining the Edge LLC that runs the Hedge Fund Educational Webinar Series, Hedge Fund Leadership Conference and Alternative Investment Cap Intro Events. Over 8500 alternative investment professionals have participated. Most profits from these events have been donated to charities that benefit at risk children, which have total over $3 million donated since 2013.
Before Agecroft, Don was a founding principal of Andor Capital Management where he was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Before Andor, Don was Head of Institutional Sales for Merrill Lynch Investment Managers (now part of Blackrock). At that time, MLIM ranked as one of the largest investment managers in the world. Previously, Don was Head of Institutional Sales and on the executive committee for NationsBank Investment Management (now Bank of America).
Don is a member of the Board of Directors of the Virginia Home for Boys and Girls Foundation. In addition, he is a former Board of Directors member of the University of Richmond’s Robins School of Business, The Science Museum of Virginia Endowment Fund, The Richmond Ballet (The State Ballet of Virginia), Lewis Ginter Botanical Gardens, Help for Children (Hedge Funds Care), Child Savers Foundation, The Hedge Fund Association and the Richmond Sports Backers. He also served over a decade on the Investment Committee for The City of Richmond Retirement System.
Donald A. Steinbrugge, CFA
Founder and CEO
Agecroft Partners, LLC
103 Canterbury RD
Richmond, VA 23221
804 355 2082
