This week we explore the allure of life insurance investments for family offices. While it’s a nuanced space, Marcus Baram learned that the sector offers superior tax-free returns to investors as well as much-needed liquidity to seniors. While the industry faces stricter regulation, the future looks bright for this alternative investment.
It’s also getting more costly to run a family office than ever before. According to J.P. Morgan’s recent global family office report, it’s costing roughly $6.1 million to operate a family office with assets north of $1 billion. Given the increase, family offices are laser-focused on strategic outsourcing more than ever.
Finally, we are excited to announce that UBS has joined Crain Currency and a Patron Sponsor. We appreciate them for their support and partnership and look forward to a meaningful collaboration
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: The allure of life insurance investments for family offices
By MARCUS BARAM
Family offices are increasingly looking beyond the public markets for better returns, putting 46% of their portfolio in alternative investments such as real estate, venture capital, hedge funds, private equity and private credit — and niche strategies like life insurance settlements to gain tax advantages.
Such products — in which a life insurance policy is sold to a third party for a one-time cash payment — have been around for decades and become increasingly attractive to family offices and high-net-worth investors. In the face of recent market uncertainties, the sector offers superior tax-free returns to investors as well as much-needed liquidity to seniors.
Almost 85% of life insurance policies don’t result in a death benefit payout because policyholders outlive the terms of the policy. Those who do sell their policies receive on average over five times more than the value placed on them by the insurance company, according to the Life Insurance Settlement Association.
Investors who buy such policies see regular rates of return every year without state and federal tax burdens. As a result, the sector is booming, and the average annual volume of new life settlements is expected to reach $5.2 billion over the next 10 years, according to a report by Conning, a global investment management firm that serves the insurance industry.
And the potential is untapped, with an estimated $200 billion worth of policies expected to lapse annually through 2027.
Family office clients of Gary Schwartz, the founder of Madison Planning Group in White Plains, New York, are increasingly attracted to the option. “I have more people doing it because of the tax advantages,” he said.
“Let's say you're a doctor making a million bucks, and you're worth $5 million or $10 million, but you're limited in what you could put away on a tax-favorable basis in a pension. You could put $300,000 or more in one of these contracts and take out income tax-free down the road, even before you die, through interest-free loans.”
Besides easy liquidity, another attraction of such products is how they help asset managers improve returns for clients by “taking advantage of inefficiencies in the life settlement market to maximize returns, reduce risks and diversify a portfolio from risks in traditional asset classes,” said Richard Beleutz, the founder and CEO of Chicago-based AIR Asset Management.
Private placement options catch eye of investors and potentially regulators
Traditionally, such settlements tended to be fairly straightforward. But in recent years, a number of new options have proliferated — including private placement options, which provide access to a variety of investments, from hedge funds to credit products and commodities within the life insurance policy structure.
“It’s gained tremendous popularity” because of such options, said Alex Shapses, the head of planning at Summit Trail Advisors, a multi-family office in New York City. “A lot of times you can go through a client’s portfolio and say: ‘You already have these positions. Now we’re just going to reallocate them within a more tax-efficient structure.’ ”
The advances in technology that allow clients to get more insight into their investments have also made such private placement insurance more attractive.
The big issue that looms over the industry is the potential for stricter regulation. Sen. Ron Wyden, D-Ore., recently released the results of an 18-month investigation into the use of private-placement life insurance, finding that it is now “a tax shelter made up of at least $40 billion in policies held by only a few thousand individuals who have net worths reaching into the hundreds of millions or billions of dollars.”
He vowed to introduce legislation that would “stop” it.
Survey: Cost of operating a family office is rising
By MARCUS BARAM
Large family offices with $1 billion or more in assets have average annual operating costs of $6.1 million, according to J.P. Morgan Private Bank’s inaugural Global Family Office Report. As a result, management and strategic outsourcing have become a priority.
“Family offices are focused on managing costs and recruiting and retaining top talent. Like any business, these two objectives may find themselves at odds amid staffing particular roles and services,” said Elisa Shevlin Rizzo, head of family office advisory at J.P. Morgan Private Bank.
Other findings from the survey of principals and professionals at 190 family offices with an average net worth of $1.4 billion touch on the increasing appeal of alternative investments, the rising threat of cybersecurity and concern over succession issues.
The average portfolio of family offices in the survey has a 45% allocation in alternative assets. The most commonly held asset is private equity and the least commonly held infrastructure at 9%.
Almost a quarter of family offices reported their exposure to a cybersecurity breach or financial fraud, and only 20% of them have cybersecurity measures in place.
Nearly 30% of family office respondents don’t have a structured approach to prepare the next generation to inherit wealth, a rising concern among principals.
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Help us with a story: We’re working on a story about family offices investing in sustainable fashion. If you have any comments on the topic, reach out to [email protected].