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Coaches Corner
Financial

How Do You Quantify An Ideal Investment?

by Jeffrey Snyder

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In today’s turbulent economic environment many investors are either frozen in fear or are watching their investments wither away. Most American investors don’t know what to do or who to trust.
 
The Problem:
When it comes to mainstream investments these days, viable options are few and far between. The stock market has been in flux over the last several years by virtue of looming inflation, spiraling oil prices and the constant threat of terrorism. Every government bureaucrat, newsletter author, financial expert, and private investor has a different take on the market's future. All, if they're truthful, will agree that the market's direction is uncertain.

Another stalwart of mainstream investment has taken a turn for the worse as well. Unsustainable appreciation in the housing sector has cast doubt in the minds of many investors who once viewed real estate as a safe harbor for their investment dollars.

Even seasoned investors, with no place to turn, are accepting big losses and taking cash positions with little to no profits. They've acquiesced to market and economic forces beyond their control to avoid uncertainties and risks. Regardless of their market prowess, no investor can time the next act of terror.

While money markets, annuities and government treasuries offer safety, the return is miniscule after inflation. Conversely, riskier investments with higher yields require impeccable market timing [read: down right luck] to keep from losing not only profits, but principal as well!

So it goes. If investors are to enjoy the double digit returns of years gone by, then they must accept enormous risks, right?

The Proposition:
If there were such a thing as the ideal investment, how would it be quantified?

Recently, a panel of individual investors with diverse goals defined characteristics that would produce such an investment. All the panelists agreed that the ideal investment would possess the following traits:

Safety & Security                                     Diversification                           No Management Fees
Mainstream                                              Liquidity                                     Performance
Clear Exit Event                                       Win//Win Investment

The Product:
Fortunately, there is an investment product that not only possesses these traits, but excels at each.

The product is called Life Settlements. Life Settlements are purchased by life settlement companies like Life Partners Holdings, Inc. (LPHI). LPHI is the oldest and only publicly traded life settlement company in the United States (NASDAQ symbol LPHI). For many years now, financial institutions including Warren Buffet's investment arm Berkshire Hathaway, AIG, ABN AMRO, Merrill Lynch, Credit Suisse First Boston, and Deutsche Bank have invested hundreds of millions of dollars in life settlements for one simple reason: Life Settlements are not subject to any stock market or economic conditions.

Statistically, approximately 90 percent of life insurance policies never pay the death benefit because they are allowed to lapse. When they lapse, the insured loses all the money they've invested into premiums and their beneficiaries receive nothing. In times past, the only other alternative for the insured was to take a very small cash surrender value amounting to only pennies on the dollar of their original investment.

LPHI offers new hope to these policy holders who no longer need their policies. LPHI will scrutinize each policy closely and will only purchase B+ or better policies as rated by A.M. Best. LPHI only deals with trusted legal reserve insurance companies. Incidentally, since 1845, there has never been a single case where a legal reserve insurance company has not paid a death benefit.

After LPHI elects to underwrite a policy, it will determine its acquisition costs and make a lump sum offer to the insured. Once the offer is accepted, LPHI will divide the policy on the market for multiple investors to buy. The good news is, now, individuals can reap the same rewards the institutional investors mentioned above have enjoyed for years. If an investor buys 10 percent of the acquisition cost, the investor owns 10 percent of the policy's face value. Once the investor's money is placed into a policy, the investor will know his or her Absolute Payout.

Since 1991, LPHI has a proven track record of greater than double digit annualized ROI; even during crisis abroad and in the wake of 9/11. Why? Again, Life Settlements are completely uncorrelated to the securities markets or economic events.

The Payoff:
So how do Life Settlements from LPHI measure up to our panels' characteristics of the ideal investment?

SAFETY: On the risk continuum, Life Settlements offer the equivalent safety somewhere between money markets and investment grade bonds.

SECURITY: LPHI and its escrow affiliate, Dunnam & Dunnam are regulated by the SEC and operate under the oversight of the Texas Board of Banking, national banking laws, and Texas Department of Insurance. They are audited by Murrell, Hall, McIntosh & Co., PLLP and KPMG, PLLP respectively. LPHI maintains an "arms length" policy for its investors so all policies and funds are held in trust. LPHI does not touch the investor’s money.

PERFORMANCE: Since inception Life Settlements as structured by LPHI has produced historic double digit returns. Past performance does not guarantee future results. This financial product has a battle tested track record through both bull and bear markets.

DIVERSIFICATION: Life Settlements are the ultimate diversification tool due to the fact that they are uncorrelated to the stock market, oil prices, interest rates and even terrorism. Life Settlements, as the cornerstone of any diversified portfolio, offer a hedge during economic downturns as well as during periods of market stability. Life Settlements serve as a better uncorrelated hedge then bonds and have the potential to generate double digit returns. They should be considered as a foundation for every investor’s portfolio.

MAINSTREAM: For many years Life Settlements were only available to institutional investors. Financial icons including Berkshire Hathaway, AIG, ABN AMRO, Merrill Lynch, Credit Suisse First Boston, and Deutsche Bank have invested hundreds of millions in life settlements with the understanding that the return of their principal and return on their principal are the contractual obligations of highly rated legal reserve insurance companies. Their pursuit of this market is related to the degree of protection and the avoidance of market and economic risk. These institutions involvement provide immense credibility because of the level of due diligence they require of any investment before actually committing their own dollars. Life Settlements presents the rare opportunity for an accredited investor to invest on a level playing field with major institutions.

WIN/WIN INVESTMENT: LPHI provides viable options through the secondary insurance market where none existed before. Senior citizens are released from the burden of high premiums and are provided lump sum payments. In many instances, this capital infusion allows them to live out their remaining years with dignity. We allow seniors the ability to turn a death benefit into a LIVING BENEFIT. The recent market downturn has made Life Settlements even more attractive to today’s retiree who depends on returns from their portfolio to supplement their retirement income.

NO MANAGEMENT FEES: All fees associated with Life Settlements are built into the acquisition costs and therefore all of the investor’s money goes to work for them. All your money is invested without paying any management fees or underlying fund expenses in cash or IRA investments. Qualified funds are subject of Custodial fees; typically around $100 to $200 annually.

LIQUIDITY: Life Settlements should be viewed as a medium to long term investment.
They are perfect for retirement dollars, college savings funds and cash investments.

CLEAR EXIT EVENT: While at certain points in time the DOW has yielded double digit returns, even the best exit strategies are formulated on speculation and conjecture. To enjoy increasing returns, one must accept the ever increasing risk of losing principal along with profits. The investor, at his or her discretion, may exit at every policy maturity. The vast majority of investors however, elect to roll over returns into additional policies. Unlike the securities markets, decisions to exit or reinvest in Life Settlements are never predicated on speculation or mere conjecture. Life Settlements can be the ultimate auto pilot investment.

In summary, a laddered portfolio of life settlement contracts offer today’s investors an excellent diversification tool with historic double digit returns that are uncorrelated to today’s volatile market conditions. And since they receive capital gains tax treatment upon each contract’s maturity, they offer a unique opportunity to any investor who has experienced a long term capital loss due to the recent downturn in the markets. Since long term capital losses can only be used to offset long term capital gains or up to a maximum of $3,000 per year of ordinary income, the absolute gains available through a Life Settlement portfolio would become virtually “tax free” to the extent the investor has a long term capital loss carryover. Net, Life Settlements offer a safe, uncorrelated historic double digit return with favorable tax treatment.

About the Author:
Jeffrey Snyder is president and founder of JP Snyder, Inc. a boutique financial advisory firm specializing in alternative financial strategies. JP Snyder, Inc. offers a wide variety of unique strategies that offer the opportunity for outstanding gains without traditional stock market risk or fees. He is also the host of the Wealth Off WallstreetTM radio program along with his wife Judi Snyder, Certified Financial Coach. Wealth Off Wallstreet is dedicated to educating listeners on the full spectrum of alternative financial strategies and can be heard live, over the internet, or podcast from their archives. For more information visit www.jpsnyder.com.




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