Unshaken by Crises: Life Settlements’ Resilience in Volatile Markets

Market crises have a way of stress-testing every asset class. The 2022 Bear Markets and the rapid 2020 COVID-19 selloff sent shockwaves through traditional portfolios, exposing vulnerabilities in even the most time-honored strategies. Investors watched classic 60/40 stock-bond allocations falter when both equities and fixed income sank in tandem, underscoring the need for truly uncorrelated assets.

Comparison of life settlements to traditional assets

The graph above illustrates a comparative analysis of S&P 500 equities, U.S. bonds and life settlements from 2018 to 2024 , covering the 2022 Bear Markets crisis and the 2020 COVID-19 crash. See previous article for methodology [ ]

Amid this turbulence, one alternative asset class remained remarkably unshaken: life settlements . Life settlements — the purchase of life insurance policies from their holders — have quietly demonstrated resilience in volatile markets, offering steady performance when conventional assets spiral. This article explores how life settlements behaved during past crises and why they are gaining traction as a stabilizing, uncorrelated component of modern portfolios.

Rethinking Portfolio Resilience in a 60/40 World

For decades, the 60/40 portfolio (60% stocks, 40% bonds) was the cornerstone of institutional investing. However, recent crises have highlighted its shortcomings. In 2022, equities collapsed and credit markets seized up, just when investors relied on bonds for ballast. In early 2020, global stocks cratered in weeks, and even investment-grade bonds wavered amid a dash for cash. These events underscored a harsh lesson: traditional diversification can fail exactly when it’s needed most.

Investors are increasingly seeking alternative diversifiers that can bolster portfolio resilience. The ideal shock absorber is an asset with low correlation to financial markets , solid returns, and manageable risk. Life settlements fit this profile. Still relatively niche, life settlements are becoming a “ growing alternative asset class on the rise ,” recognized for their attractive features. Unlike stocks and bonds, their performance isn’t driven by economic cycles or corporate earnings. This independence makes them a compelling addition for those looking to break the mold of the 60/40 portfolio .

Tested by Turbulence: How Life Settlements Fared in 2020 and 2022

Asset class correlation coefficient,

Methodology — Calculated correlation coefficient between average returns for relevant asset classes over 2018–2024 period. Annualized returns and standard deviations for life settlements, equities, treasuries and high-yield corporate bonds are calculated over the period 2018–2024. (1) Life settlement data and returns are modeled using a log-normal distribution calibrated to a 3.8% standard deviation and 12% annual return, based on internal research, data from Ress Capital, AAP, and RISX index. Monthly returns reflect compounded performance consistent with published institutional funds returns. (2) Equities represented by the SPX 500 Index; (4) treasuries by S&P U.S. Treasury Bond Current 3-Year Index & (5) S&P U.S. Treasury Bond 7–10 Year Index, (3) high-yield bonds by S&P U.S. High Yield Corporate Bond Index.

Research from the period shows that life settlements had virtually no statistical correlation with the S&P 500 Index, meaning their returns moved independently of stock performance. Investors holding life settlements in 2022 saw their portfolios buffered from the year’s equity carnage — a powerful validation of the asset’s resilience.

2020 — COVID-19 Crash: The brief but violent market crash of March 2020 provided a more immediate test. As the S&P 500 plunged ~34% in a matter of weeks, life settlements again showed an uncanny immunity to market contagion. Funds focused on life settlements reported negligible volatility during that quarter, largely avoiding the wild swings that hit public markets. This outcome makes sense: the pandemic, while tragic, did not impair the mechanics of life settlement assets — if anything, the unfortunate increase in mortalities could shorten some policy durations, but such effects unfold over longer periods rather than immediate price shocks. Indeed, a life settlement fund generates steady returns from policy maturities and is not exposed to equities or other investible assets . Thus, even in one of the fastest market meltdowns in history, life settlements lived up to their billing as uncorrelated, crisis-resistant holdings.

It’s important to note that life settlements’ lack of correlation isn’t just anecdotal but is borne out by data. Analyses of life settlement performance over time find near-zero correlation to major asset classes . Whether stocks soar or plunge, whether interest rates rise or fall, the maturities and payouts of life policies proceed on their own timeline. The 2020 and 2022 episodes highlight that during the very worst market storms, life settlements’ performance remained unflappable — no fire-sales, no liquidity-driven markdowns, just the gradual accrual of yield.

Why Life Settlements Stay Resilient

Life Settlements’ Strong Risk‑Adjusted Returns vs. Other Assets

Methodology — Annualized returns and standard deviations for life settlements, equities, treasuries and high-yield corporate bonds are calculated over the period 2018–2024. (1) Life settlement data and returns are modeled using a log-normal distribution calibrated to a 3.8% standard deviation and 12% annual return, based on internal research, data from Ress Capital, AAP, and RISX index. Monthly returns reflect compounded performance consistent with published institutional funds returns. (2) Equities represented by the SPX 500 Index; (4) treasuries by S&P U.S. Treasury Bond Current 3-Year Index & (5) S&P U.S. Treasury Bond 7–10 Year Index, (3) high-yield bonds by S&P U.S. High Yield Corporate Bond Index. Sharpe ratios calculated using an average risk-free rate for the period (U.S. 3-Month Treasury Bill, Federal Reserve 2018–2024). Data sourced from Bloomberg, Morningstar Direct (2024), Ress Life Fund Reports (2018–2024), The Asset, March 2024, and FRED (Federal Reserve Economic Data, 2018–2024). Additional sources: Capital IQ, Federal Reserve Economic Data, AM Best, Expert interviews, EverOak Innovations analysis

High Yield, Low Volatility: The Appeal to Investors

Beyond crisis performance, life settlements offer an attractive return profile in ordinary times. Many life settlement strategies target high single-digit to low double-digit annual returns , net of fees. These returns stem from purchasing policies at a discount and eventually receiving the full death benefit, generating a yield that is often comparable to private credit or equity-like returns. Yet unlike equities, the ride tends to be much smoother. With careful actuarial selection and sufficient diversification across many policies, the volatility of a life settlement portfolio can be substantially lower than that of stocks or even high-yield bonds . In effect, investors may achieve equity-like returns with bond-like volatility — a combination that translates into strong risk-adjusted performance. It’s no surprise that life settlements are noted for their strong risk-adjusted returns relative to other asset classes .

Another key appeal is the drawdown profile . Historically, life settlements have shown minimal drawdowns (if any) on an annual basis, even when markets are in turmoil. For institutional investors, avoiding large losses is crucial; a -20% year in equities requires +25% the next year just to break even. Life settlements’ ability to preserve capital in bad years means an allocation to them can raise the floor of portfolio performance . In fact, studies suggest that incorporating life settlements alongside traditional assets can enhance a portfolio’s cumulative yield and return over time . For example, a diversified portfolio that included life settlements during the past two decades would likely have outpaced a plain 60/40 portfolio, with a smoother ride, thanks to the steady gains from the life settlement component. The uncorrelated, superior risk-adjusted returns of life settlements make them an intriguing “insurance policy” for the overall portfolio — one that pays off when other investments struggle.

Key Takeaways for Resilient Portfolio Construction

In a world where market crises seem to arrive without warning, the case for life settlements as a portfolio diversifier is growing stronger. They have proven to be resilient through extreme downturns , offering shelter from the storm when virtually all other assets are suffering. For institutional and accredited investors in the US and EU who may be less familiar with this niche, the message is clear: life settlements merit consideration as part of a robust alternative allocation. Key takeaways include:

• True Diversification: Life settlements provide true diversification. Their performance is uncoupled from macroeconomic and market risk factors, which can significantly reduce overall portfolio volatility and drawdown in crisis periods.
• Attractive Risk/Return Profile: With targeted returns in the low-teens and relatively low volatility, life settlements can punch above their weight in terms of risk-adjusted returns. This means a smaller allocation can have a outsized impact on improving portfolio Sharpe ratio and stability.
• Capital Preservation in Crises: Perhaps most importantly, life settlements have a track record of capital preservation during market crashes . In 2020 and 2022, when many portfolios were deep in the red, life settlement investments held steady or continued to generate positive gains. This reliability can help investors avoid the costly math of big losses and contribute to smoother long-term compounding.

Of course, incorporating life settlements is not without considerations. Diligence is required in manager selection, given the specialized nature of this asset class, and investors must be comfortable with the illiquidity and unique longevity risks. However, for those aiming to build an all-weather portfolio , the resilience of life settlements is hard to ignore.

Originally published at https://www.linkedin.com.