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We've written about life settlements before in the post titled A Risky And Wild Investment. The Wall Street Journal just ran a story that confirms everything that we've said and adds some analysis of one of the biggest providers of these products. You can read it here.
We hear the advertisements on the radio frequently that make statements about offering "double digit returns with no market risk." The facts don't support it. These investments are illiquid and the industry is, at least in Texas, unregulated. Unfortunately, by the time most of the people who have invested in life settlements figure out that the return isn't going to be what was promised, there won't be much that they can do about it.
If it sounds too good to be true, it almost certainly is. If it's a product that's heavily promoted or sold on the radio, be suspicious. Radio time and advertisements are not cheap, so that's a pretty good clue that the product pays big commissions. Where do you think that money comes from?
It is axiomatic in the study of capital market behavior that "there's no such thing as a free lunch." If you're not familiar with it, this phrase was popularized by economist Milton Friedman and it simply means that it is unreasonable to expect something for nothing. In this case, it is unreasonable to expect a high rate of return for an investment that supposedly carries very little risk. Either the return is being overstated, the risk is being understated, or both.