The investor gets a return that in effect reflects the difference between the buyout price and the death benefit, taking into account the cash flow.
But in the absence of any rules and regulations, are these investments a good deal?
Stephan Leimberg, publisher of Leimberg Information Services Inc. and editor of Tools and Techniques of Life Settlement Planning, said the major advantage of investing in life settlements is that it's an asset, the performance of which is not tied to the performance of a stock market.
Brian Casey, partner with Locke Lord Bissell & Liddell, added that there's a chance for low double-digit returns and that credit risk of the life insurance company is less than for many other types of creditors.
There are, however, certain "ordinary" investor risks, according to Leimberg.
The first is longevity risk--"that due to medical advances or lifestyle changes, the insureds break the expected lifespan barrier," said Leimberg.
"When that happens," he added, "the buyer of the insured's policy will have to pay more premiums and that equates to lower than expected profits."
The second risk is that the underwriters got it wrong, Leimberg said. In other words, the underwriters underestimated how long the insureds will live. Remember, the shorter the lifespan, the higher the investor's profits. Underestimating life expectancy leads to lower than anticipated returns or a loss, said Leimberg.
And that's not a small risk according to Leimberg. "Life expectancy tables have not been accurate--particularly for small face-value policies," he said.
Third, there is a legal risk or what Leimberg calls a "polluted" portfolio.