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Thread: Stocks and "the market"

  1. #106
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    Quote Originally Posted by Art Mann View Post
    So then the insurance companies don't have to have 100% of their liabilities in reserve. I already knew that but was just wondering why you said something so irrational.

    Insurance companies do the same thing with their assets that a mutual fund does with its assets. They invest them in stocks, bonds and a host of other investment vehicles. If you choose a good insurance company to deal with, then you are pretty safe. If you buy an insurance policy written on someone by an unsound insurance company then your investment is risky. There is no such thing as a risk free investment and the riskier it is, the more up side potential there is. The market is incredibly efficient.
    It has zero to do with the insurance company investing in anything. The insurance company isn't the seller. I really could care less how they invest their money. I suppose it's true there is no risk free investment but this is as close as you can get. 300 to 350 per cent yield in 5 - 7 years. This isn't available to everyone. As I said you have to be accredited. You can research that if your interested.

    Just for discussion sake let's say you have 1 million dollar life insurance policy and for whatever reason you want or need money now. If you are over 65 then you are eligible to sell. You can put it out there for sale. You might receive none or several offers depending upon whether it looks to have a reasonable expectation of paying of in the near future. Determined by the actuarial tables. Suppose after all the pro's and con's are weighed you receive an offer of 300 hundred thousand for it. If you accept you will be paid that amount and ownership will be taken over by the investment group as well as premium payments. The face value of the policy will pay to the investment group and be divided accordingly. The only point that the insurance company becomes a player is when a claim for death benefits is filed. Until then it's business as usual for the insurance company.

  2. #107
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    Charles Schwab has recently eliminated their trading fees, others had to follow suit. This means buying and selling short terms does not eat up money in fees like it used to. I sold about 9,000$ of stock recently and the fee was 17 cents. Not sure what the fee was it was described as market fee or some such.
    i am now a big fan of exchange traded funds. Low annual fees (0.03%) for mine and no fees in or out. A traditional managed account will not do much better and the fees will eat up any extra returns. If they charge 1.00% management fee they have to make 0.97% more then mine to break even.
    Bill D

  3. #108
    Quote Originally Posted by Art Mann View Post
    So then the insurance companies don't have to have 100% of their liabilities in reserve. I already knew that but was just wondering why you said something so irrational.

    Insurance companies do the same thing with their assets that a mutual fund does with its assets. They invest them in stocks, bonds and a host of other investment vehicles. If you choose a good insurance company to deal with, then you are pretty safe. If you buy an insurance policy written on someone by an unsound insurance company then your investment is risky. There is no such thing as a risk free investment and the riskier it is, the more up side potential there is. The market is incredibly efficient.
    Well, the market is not _perfectly_ efficient, but one thing that is guaranteed, is that some middleman is taking his cut in this case. Otherwise why would they bother. Follow the money.

  4. #109
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    That proposition does not address the risk issue. In order for an insurance company to pay out anything, it must remain solvent and make large sums of money. It is not a ponzi scheme. The way they do that is to invest in the stock and bond markets, among other things. If they invest poorly, the company fails and the policy becomes worthless. If you paid for that policy, then you lose. So, you are, in reality, investing in the stock market indirectly whether you know it or not. Furthermore, if you pay $300,000 for a million dollar policy and then wait 15 years for the guy to die, then you haven't done as well as I have historically speaking. The amount you pay for a policy benefit is related to how risky and potentially long term the policy and company is. The risk is just obscured -- not negated.

    Quote Originally Posted by Ronald Blue View Post
    It has zero to do with the insurance company investing in anything. The insurance company isn't the seller. I really could care less how they invest their money. I suppose it's true there is no risk free investment but this is as close as you can get. 300 to 350 per cent yield in 5 - 7 years. This isn't available to everyone. As I said you have to be accredited. You can research that if your interested.

    Just for discussion sake let's say you have 1 million dollar life insurance policy and for whatever reason you want or need money now. If you are over 65 then you are eligible to sell. You can put it out there for sale. You might receive none or several offers depending upon whether it looks to have a reasonable expectation of paying of in the near future. Determined by the actuarial tables. Suppose after all the pro's and con's are weighed you receive an offer of 300 hundred thousand for it. If you accept you will be paid that amount and ownership will be taken over by the investment group as well as premium payments. The face value of the policy will pay to the investment group and be divided accordingly. The only point that the insurance company becomes a player is when a claim for death benefits is filed. Until then it's business as usual for the insurance company.

  5. #110
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    I remember when the oldest women in the world was French. She lived to be 122 years old. She sold her house with a reverse mortgage when she was 60 something. She got paid every month until the day she died or had to move out. She had to move into an old folks home about 55 years latter so the payments stopped then.
    Bill D

  6. #111
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    Quote Originally Posted by Art Mann View Post
    That proposition does not address the risk issue. In order for an insurance company to pay out anything, it must remain solvent and make large sums of money. It is not a ponzi scheme. The way they do that is to invest in the stock and bond markets, among other things. If they invest poorly, the company fails and the policy becomes worthless. If you paid for that policy, then you lose. So, you are, in reality, investing in the stock market indirectly whether you know it or not. Furthermore, if you pay $300,000 for a million dollar policy and then wait 15 years for the guy to die, then you haven't done as well as I have historically speaking. The amount you pay for a policy benefit is related to how risky and potentially long term the policy and company is. The risk is just obscured -- not negated.
    You read the parts you choose to read and ignore what you choose to. NEVER is it 15 years. Or even 10. Like I have already said you are happy and I am happy. No more from me on this.

  7. #112
    I'm not advocating for or against Life Settlements in any way, but from what I know the policies being purchased are generally from highly rated AM Best insurers. The likes of Prudential, Met Life, New York Life, Mass Mutual. The likelihood that one of these companies would default on a policy benefit payout is very very low. Please remember that an individual investor is generally not buying a single policy, what they are investing in is a pool of policies that have been aggregated by a third party Life Settlements company, often times a private equity company. This party is functioning as the intermediary between you as an investor, the original policy holder, and the life company. I would say the biggest risk in the investment would be the performance of this third party company. To a great degree you are relying upon their underwriting and management skills when they assemble and administer the pool. They are supposed to be considering many factors when they price what they will pay for a policy.

    In the end what you are buying is the spread between the discounted net present value of the policy and the price that policy holder is agreeing to accept to assign his/her policy benefits to the pool. The Life Settlement company is taking a cut of the spread and probably an ongoing management fee for administering the pool. I would not be surprised if they also take an origination fee and probably also a few other creative types of fees.

    Ironically, someone in this thread mentioned Warren Buffett and his mantra to only invest in what you understand. Well Buffett and Berkshire Hathaway are a big player in Life Settlements, to the tune of about $600MM per year through their subsidiary Berkshire Settlements. So apparently he understands it.

    To really simplify this, think of a check cashing place. The original policy holder is like a check cashing customer insofar as what they are doing is cashing out their life policy prematurely at a discount due to some changed circumstance in their life. The Life Settlement business (check cashing place) is agreeing to cash out the policy a discount spread. The Life Settlement investor is investing in the check cashing place. The life insurance company is maker of the check who will honor it when it is eventually presented to them, when the original policy holder dies. IMO many in this thread are focusing on whether the life company might not honor the check, but I would say the bigger risk is that the check cashing place goes belly up (or front loads the fees and absconds). But if they are a legitimate investment company with a track record, hopefully this will not be the case.

    The people who came up with this figured out that cash surrender values of most policies were so low that it would be possible to buy the policy from the insured at a more attractive price (to them) and still make a healthy return.

    FYI, I am not an investor in Life Settlements, not am I recommending for or against them. I would consider them an alternative investment, and thus I would expect the returns to be higher but the investment to be less liquid than a conventional marketable investment. As with any alternative investment, you wouldn't want to go all in and put your entire portfolio into an investment class like this, but it is absolutely sound as a portion of your portfolio. I hope this is a helpful summary.

    Edwin

    P.S. One other thing - In the event the policy is from a lower rated insurer, maybe a sound insurance company but not in the league of the household names, then that policy purchase would be priced accordingly, i.e. a bigger discount.
    Also, the overall pool may have been underwritten to provide for some % of default or loss for the sake of conservatism and to cover any unforeseen contingency losses. Again, this is not to say there would not be risks because after all, pools of mortgages were assembled in this same way before the 2007 financial crisis, however one difference here is that pools of life policies are not exposed to asset bubble risks, crashes or corrections in the mainstream markets.

    Another factoid - You might be wondering why a policy holder would want to prematurely cash out their policy and take a haircut to do so in the first place. One of them is the trend in recent years of increasing estate tax exemption. A common use of life insurance is to fund estate taxes due upon the death of the policy holder when assets are distributed to next generation heirs. Now that the exemption is much higher than it was, there is a market of people who are basically over-insured. Another reason would be if you determine that your heirs really don't need the death benefit money. For example, Mark Zuckerberg's father might not need his life insurance any longer and might decide to assign it to a Life Settlement fund to cash out.
    Last edited by Edwin Santos; 02-18-2020 at 11:33 AM.

  8. #113
    Quote Originally Posted by Edwin Santos View Post
    ronically, someone in this thread mentioned Warren Buffett and his mantra to only invest in what you understand. Well Buffett and Berkshire Hathaway are a big player in Life Settlements, to the tune of about $600MM per year through their subsidiary Berkshire Settlements. So apparently he understands it.
    A major contributor to Buffett's cash flow is the insurance business, at which he is an expert (and of course he is a very shrewd businessman.) Would I want to be on the opposite end of a deal with Buffett in this area? No.

    His recommendation to his family members, as to where to invest after he is gone, is on record as being S&P 500 index funds and things closely related to that.

  9. #114
    Quote Originally Posted by Doug Dawson View Post
    A major contributor to Buffett's cash flow is the insurance business, at which he is an expert (and of course he is a very shrewd businessman.) Would I want to be on the opposite end of a deal with Buffett in this area? No.

    His recommendation to his family members, as to where to invest after he is gone, is on record as being S&P 500 index funds and things closely related to that.
    You couldn't be on the opposite end of a deal with Buffett in this area unless you were the insured person selling your policy to him. With regard to Life Settlements, he is the investor, marketing to policy holders to consider selling their policy to him. He is not soliciting investors for this specific line of business so if you wanted to participate (indirectly), your option would be to buy stock in Berkshire Hathaway in which case your money is right alongside Warren's.

  10. #115
    Quote Originally Posted by Edwin Santos View Post
    You couldn't be on the opposite end of a deal with Buffett in this area unless you were the insured person selling your policy to him. With regard to Life Settlements, he is the investor, marketing to policy holders to consider selling their policy to him. He is not soliciting investors for this specific line of business so if you wanted to participate (indirectly), your option would be to buy stock in Berkshire Hathaway in which case your money is right alongside Warren's.
    Yes. As part of a balanced well-diversified portfolio, BH is a non-tiny part of the S&P 500. Just so you don't have to think about where Life Settlements is heading w.r.t. it's current tax status, etc. Nobody likes surprises with this stuff.
    Last edited by Doug Dawson; 02-21-2020 at 4:36 PM.

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