Life Settlements and Structured Products for HNW Investors

The search for non-correlated returns and genuine portfolio diversification leads many high-net-worth investors beyond conventional equities and bonds. Two alternative strategies — life settlements and structured products — deserve serious examination. Both are misunderstood; both carry real risks; and both can play a legitimate role in a sophisticated portfolio when properly understood and correctly sized.

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What Is a Life Settlement?

A life settlement is the purchase of an existing US life insurance policy from a policyholder who no longer needs or can afford to maintain the policy.

Here is how the transaction works:

1. The policyholder holds a US life insurance policy with a face value (death benefit) of, say, $2 million. They originally bought it for estate planning purposes, but their estate has grown enough that they no longer need the coverage; or their health has deteriorated and they can no longer afford the premiums; or they simply need liquidity.

2. The cash surrender value — what the insurance company would pay if the policyholder cancelled the policy — might be $200,000.

3. A life settlement provider (acting as broker or principal) offers the policyholder $400,000 for the policy — more than the surrender value, but less than the $2 million death benefit. The policyholder accepts.

4. The investor (directly or via a fund) now owns the policy. They continue paying the premiums (perhaps $60,000 per year). When the insured individual dies, the investor receives the $2 million death benefit.

The investor's return depends on three variables: the purchase price ($400,000), the ongoing premiums paid, and the time until the insured individual's death (which determines how long premiums are paid and when the benefit is received). If the insured dies in two years, the return is exceptional. If the insured lives another 20 years, returns may be poor or negative.

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The Life Settlement as an Alternative Investment Class

Life settlements have several characteristics that distinguish them from conventional asset classes:

Uncorrelated returns: the underlying driver of return — human mortality — has essentially no correlation with equity markets, interest rates, credit spreads, or property values. A global financial crisis does not affect the rate at which people die. This makes life settlements genuinely diversifying in a portfolio context.

Actuarial foundation: specialist life settlement fund managers use life expectancy reports from independent medical underwriters to estimate the insured's remaining lifespan. The portfolio is diversified across many policies (each with different insureds, face values, and expected maturities) to reduce concentration risk.

Return targets: life settlement funds have historically targeted returns of 8–12% per annum, though actual returns vary significantly with portfolio construction and mortality assumptions. These are target returns, not guaranteed.

Liquidity: life settlement funds are typically illiquid. Lock-up periods of three to seven years are common. This is not a short-term investment.

Access: the minimum investment in a life settlement fund is typically $250,000 or more. UK-accessible funds are available via offshore investment vehicles; some are structured as FCA-regulated collective investment schemes. Due diligence on the fund manager, actuarial methodology, and counterparty arrangements is essential.

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The Ethical Dimension

Life settlements have attracted persistent ethical criticism, and a responsible investor should engage with this debate honestly.

The critics' argument: life settlement investors profit from the death of the insured individual. The sooner the insured dies, the higher the return. Critics argue this commodifies human mortality and creates a perverse financial interest in a person's death.

The proponents' argument: the policyholder receives fair value — substantially more than they would receive by surrendering the policy to the insurance company. The policyholder enters the transaction voluntarily and with full information. The insurance company, not the investor, set the terms of the original policy. Life settlement transactions allow policyholders to monetise an asset that would otherwise generate no value for them.

Regulatory context: the US life settlement market is regulated at the state level. Investor-initiated murder to collect death benefits is both practically impossible (the investor has no contact with the insured) and legally impossible (life insurance policies include "material misrepresentation" and murder provisions voiding the policy). The ethical concerns are real but relate to the commodification of mortality rather than any direct harm.

Each investor must reach their own view on these considerations.

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Due Diligence for Life Settlement Investment

Before committing capital to any life settlement vehicle, a thorough due diligence process should address:

• Fund manager track record: how many policy portfolios has the manager run to completion? What were the realised internal rates of return versus projections?
• Life expectancy methodology: which medical underwriting firms produce the LE reports? Are multiple independent LE assessments used per policy? What is the historical accuracy of LE estimates?
• Premium management: how does the fund finance ongoing premium payments during the holding period? A fund that runs short of premium funds may be forced to lapse policies — destroying the investment.
• Portfolio diversification: how many policies? How diversified by age, gender, health condition, and policy size?
• Regulatory status and jurisdiction: is the vehicle FCA-regulated? Under what regulatory framework is it structured?
• Exit mechanisms: how does the fund provide liquidity to investors who need it before maturity?

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Structured Products: The Basics

Structured products are investment instruments — typically notes or certificates issued by a bank — that combine a conventional investment (usually bonds or equities) with a derivatives component to create a specific risk-return profile.

The most common types are:

Capital-protected notes: the note guarantees return of the invested capital at maturity (typically five to six years), regardless of market performance. On top of this, the investor participates in a proportion of the upside in a reference index (such as the FTSE 100 or S&P 500). The cost of the capital protection means the participation rate is below 100% — often 60–80%.

Autocallables: if the reference index or basket of shares reaches a defined level (usually 100% of its starting value) on annual observation dates, the product "autocalls" — returns the investor's capital plus a coupon (often 7–12% per annum). If the market falls, the product rolls over to the next year. There is typically a "barrier" — if the market falls below (say) 60% of the starting value at maturity, the investor participates in the full loss. Autocallables are popular because they generate income in flat or modestly rising markets.

Reverse convertibles: pay a high fixed coupon but expose the investor to the downside of a reference share or index. Above the barrier at maturity = coupon plus capital returned. Below the barrier = shares (or their equivalent) delivered at a significant loss. These are higher risk than they appear.

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How Structured Products Are Priced

The bank that issues the structured product is the counterparty. The bank's credit quality therefore matters: if the issuing bank fails, the investor may lose their capital regardless of the structure's terms (this is what happened to some structured product investors who held Lehman Brothers-issued notes in 2008).

Embedded costs: structured products typically have:

• An upfront distribution fee (paid to the distributor, often 2–3%).
• An ongoing charge reflected in the product pricing (the bank takes a margin on the options used to construct the payoff).
• The total cost of a structured product is often not transparent. Independent analysis using options pricing models typically reveals the "value" of a structured product at inception is 5–10% below the price paid.

Ongoing charges figure (OCF): unlike funds, structured products rarely disclose a clear OCF. The costs are embedded in the construction and are effectively invisible to the retail or HNW purchaser. This lack of transparency is a significant criticism of the structured products industry.

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When Structured Products Make Sense

Despite the criticisms, there are scenarios where structured products are genuinely appropriate:

• Capital protection for a defined liability: an investor who knows they need £500,000 in five years (for school fees, property purchase, or business investment) and cannot afford to lose it may find capital-protected notes useful — accepting a lower participation rate in exchange for certainty.
• Income generation in low-rate environments: autocallable structures with high coupons are attractive when conventional bond yields are very low and the investor seeks income without full equity risk.
• Defined-risk exposure: for investors who want equity market exposure with a precisely defined downside barrier, structured products offer a clarity of risk profile that an equity fund does not.

When structured products are wrong:

• As a substitute for a diversified long-term portfolio.
• When the investor does not fully understand the payoff structure, the barrier, or the issuer credit risk.
• When the embedded costs are not analysed and compared with simpler alternatives.
• When the investment horizon does not match the product term (early exit is expensive or impossible).

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Comparing Life Settlements and Structured Products

Feature	Life Settlements	Structured Products
Correlation to markets	Near zero	Moderate to high
Liquidity	Low (3–7 year lock-up)	Low to medium (secondary market exists)
Return driver	Human mortality	Equity/credit derivatives
Regulatory oversight	Variable (US state law)	FCA-regulated (UK distributor)
Typical minimum	$250,000+	£10,000+
Principal protection	No (actuarial risk)	Yes (in capital-protected products)
Transparency	Low	Low

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Regulatory and Compliance Considerations

Both life settlement funds and structured products are complex investments. Under UK FCA rules, they are generally restricted to professional investors, high-net-worth investors (as defined under FSMA), or sophisticated investors who meet specific criteria. The obligation to assess suitability lies with the regulated adviser. The Consumer Duty (2023) requires advisers to demonstrate that any such recommendation is in the client's interests and that the client understands the product.

Neither vehicle is suitable for capital that cannot be committed for the full term. Both require specialist due diligence that goes beyond reading a product brochure.

This guide is for informational purposes only. Past performance is not a guide to future returns. The value of investments can fall as well as rise, and you may receive back less than you invest. Life settlement funds and structured products carry specific risks described above. Seek professional advice before investing.

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How Global Investments can help

Global Investments works with internationally mobile HNW clients on portfolio construction across the full spectrum of alternative investments, including specialist alternatives such as life settlements and structured products. We analyse embedded costs, counterparty risk, and the role of each instrument within the wider portfolio before making any recommendation. Our independent status means we have no incentive to favour high-margin products over simpler alternatives. If you are exploring non-correlated return sources or capital-protected strategies for a specific financial objective, speak with our advisory team.