Have you been looking for a better spot to park your IRA or 401k money?
Where can you invest it where you get at least 10-12% annual returns with NO market risk, allowing you to sleep at night?
Guest Kevin Nichols joins our host & Cash Flow Expert, Chris Miles, to discuss how you can put your money in life settlements.
You can also see a PowerPoint presentation HERE – Use the pass code “penumbra” to get access to it!
Enjoy!
Kevin Nichols Bio:
Kevin, formerly a financial advisor, left the industry to become the managing partner at Penumbra Solutions. Penumbra Funds invest in hundreds of Senior Life Settlement insurance policies. With a target yield in the low double digits, and no market risks, this might be the best investment you have never heard of!
Chris Miles Bio:
Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.
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Listen to the podcast here
Awesome Strategy For Your IRA
I have a special guest on for our show that I’m super excited about. This is a guest that I have been sending referrals of my own clients for years. He has done an amazing job. His name is Kevin Nichols. He is one of the partners in Penumbra. The one thing I love about Penumbra is that what they do, especially if you are someone who is an accredited investor, and for those of you that are not sure if you or not, that’s one either you have $1 million of net worth, above and beyond your equity in your house. Take that out.
You see, they got $1 million net worth, or you make at least $200,000 in a year individually or $300,000 a year as a couple. You fit in that category at all. This is something you should look into, especially if you’ve got IRA money or 401(k) money or something like that. You think you can roll over to do something better.
The market has not been great. The market is still there, but if you’ve had a decade of a market going up, you are likely to have at least a few years of the market going down. This is probably not the time to be gambling your money into the market, as I have already mentioned on this show. This is something that can get you a real steady 10% to 12% return is awesome. Kevin is living out in Texas. He has done great work with that. Kevin, I’m excited to have you on our show.
Thanks for having me. I learned a new word. A rippler.
We are all about creating a ripple effect in our lives and the lives of others.
I like it.
Tell us more about what took you down this path in your life.
I’d been a beneficial planner for many years. I have a business partner and together, we have invested in life settlements. Will explain a little bit about what they are. It’s essentially a senior citizen who no longer wants a life insurance policy, and you buy it from them. You give more cash than they have got in the policy. In other words, it’s a benefit to them. When they pass, you collect the death benefit.
For several years, we had bought them as investors. We had bought what used to be referred to as fractionalized life settlements. We know how to do that. One day, my partner had a policy that matured and that same week, I had a policy that needed a premium payment that I had to make. I said, “Wouldn’t it be great if we threw all of them together?” In that way, if one of us wins, we both win, and if one of us has to make a premium payment, then we both share the burden, and he said, “That is a good idea.”
We thought about it and we had several clients who had them as well. My dad owned some and his mother-in-law owned some. We created a pool and we started doing that. It worked so perfectly that all of our clients wanted to be a part of the pool instead of owning it on their own. That’s how it began, and within two years, we could no longer do financial planning.
Life settlements are a win-win situation because the seller is given more than either the cash value or the insurance company will give them. This way, they don’t have to make premium payments. Click To TweetWe had so many advisors from across the country bringing us their clients that we felt it would be a conflict for us to be actively engaged in financial advising or financial planning. We have stopped that altogether, and this is now all we do. We are on our eighth private equity fund. We start a new fund every year. It works beautifully. That’s how we got into it backward and it’s been phenomenal.
It’s incredible when I talk about life settlements because a lot of people, even people that have been investors, often have never even heard of these, even know this was even possible. I did a show about using your whole life policy and stuff. I’d even mentioned the fact that you could be the person on that receiving end where you might say when you are in your 80s or 90s. “I’m out of money. I need more cash. I want to sell my policy off to an investor, which is exactly what you do is you buy policies from people so that they can have cash now while you become the beneficiary.
That’s exactly it. It’s a win-win situation because we always give the seller or the insured more than the cash value or more than the insurance company will give them if the insurance company gives them anything. They don’t have to make premium payments. We collect the death benefit when they pass. There are so many variants of that we do that we have done, we can do, we will do.
For example, we have someone who wants to sell a policy, but they still want some money for a death benefit. They are afraid they wouldn’t be able to qualify due to health for a new policy, like say they had a $2 million policy they wanted to sell and they wanted to keep a few hundred thousand for final expenses. We will structure a deal with them where they are able to retain. It’s called a retain death benefit transaction, where they can retain a portion of the death benefit that’s irrevocable and at the carrier level. We make that irrevocable so that it will never go away. It’s very much a win-win situation.
You get the money from when they die, but they get the money while they are alive too.
That’s exactly it. There were a lot of people selling their policies after 2008 when the market crashed because even as younger people who were in the market and investing, a lot of these older people still had money on the market. They probably shouldn’t have in all candor, but they did, and so now they don’t have as much money to live on, and so a lot of them would sell their policies.
For most life settlement companies, a typical transaction would be an 85-year-old grandmother. She wants to sell the policy. She can no longer afford it. It has no cash value. It’s probably a universal life or it’s a term life policy that has been converted or can be converted to universal life. We’ll take a look at the premium obligations on that, and we’ll take a look at her health and then we’ll make an offer to her.
It gives her cash in her pocket and is going to give us a good yield for our investors and we’ll purchase the policy. When she passes, we collect the death benefit. It’s very simple. We have refined it to the point where we are very particular about what we buy. We focus on age, the average age. We have probably 1,800 policies across all 8 funds. The average age is about 90 and a half years old.
Most companies I have talked to, usually it’s in the 80s. I had somebody who wanted me to promote my clients. He said, “I have got these policies, but they have already gone for over the 6 or 7-year mark. Now they get to have premiums paid in and this investor doesn’t want to keep them anymore. Will one of your people want to buy these policies now this lady’s now 90 years old?” “Maybe, but if you have to keep paying the premiums, it could be three and a half years, and you’ve already lost.” You have basically eaten up your returns. I have seen 90-year-olds and I have other doctors that follow they will say the same thing. They will say, “I have seen 90-year-olds that are in perfect health die the next day when they are 90, and then 90-year-olds that are in horrible health, lived until 100.”
It’s true. If you are focusing on people who are anywhere from 82 to 87, the premiums are not near as expensive as they are when you are 90, but here’s the thing. If you are interested in a policy from someone that age, you get a medically underwritten life expectancy estimate, which is pretty common in this industry and we get them as well, and they live long. More than 60% of the time, people outlive that life expectancy estimate. If they live long and it’s a universal life policy, those premiums go up exponentially and most funds or individual investors are in no position to handle the premium load. Now it becomes a losing proposition from them, and how quickly can they get out?
We are players at that level. If someone’s got one like that, we’ll take a look at it and make an offer on it. We’ll buy them from other funds and other institutional investors, but we also buy directly from the insured, but you have to be real careful. We specialize in that age group of being 90 plus years old. I would say, when we are looking at policies, we are looking for a minimum age of 85, but the average age is about 90 and a half. Most of our policies are probably, 89 to 92.
You are making way more than 10% to 12%, which is why that’s what you guys are paying in the fund.
What we are doing is we state in our prospectus. It’s called a memorandum of private placement. It’s not technically a perspective, but most people call it a prospectus. We stayed in there that the target yield for the fund is 10% to 12% annualized net of all fees, and our fees are very low because, quite frankly, when we originally set this up, my dad was our first investor and there was no way in the world that I was going to have to explain to him while I was taking so much of his money. I say it’s 10% to 12% annualized and net of fees, but we’d be pretty disappointed if that’s all we were able to deliver to investors most of the policies that have matured.
If you were to take a look at all the policies that have matured since 2010, we have had a total of 430 some odd policies mature. The average yield on those policies is right at about 90%. It comes down from there because those are policies that have matured. Most policies have not matured. When you are dealing with people that age, we don’t have to be focused on life expectancy because, honestly, we don’t care because how long will a perfectly healthy 91-year-old live? It’s a good question. We use the CDC, their actuarial tables. We use VBT, which is called Valuation Basic Tables, which is an actuarial table from the insurance industry.
They say they are perfectly healthy 91-year-old will live probably to 96, but they generally frequently don’t. We don’t have to worry about somebody being wrong with the life expectancy estimate. We figured that if the average age is 90 to 90 and a half, the odds that there are going to be very many of these people alive in eight years are very slim. We don’t worry about that. It’s been a great model for us. It’s worked perfectly. We haven’t changed the structure of our funds at all over the last eight funds.
We lowered our fees because we started out our first fund. We charged 1.75% as what we call an organizational and offering fee. That came to reimburse us for setting up the fund, the premium, the printing and setting up the escrow. We have to set up an escrow because we don’t ever touch your client’s money. We don’t ever even have access to it. We pay somebody to do that. The 1.75% was to reimburse us for setting up the funds, and then our management fee is we get 2.5% of the payout when they pay, and that’s it]. There are no other recurring fees from us at any point in time in the fund.
I have seen those companies have that. The other companies that I have been introduced to that do the same thing, essentially the same thing you do, but they do charge a lot more fees. That’s true.
We have taken some heat about that. You guys are ruining the market because you are only charging X. You are leaving so much money on the table. I go back to my dad. I am not about to explain to him why I need more money out of his pocket. The largest investor in our funds is us. We participate. We invest in every single fund right alongside your clients, and I don’t like fees either.
That’s the model we have used. 2005, we switched our custodians. We are with the Bank of Utah now. We were able to negotiate a little bit better deal on the cost of their custodianship. We lowered the fees from 1.75% down to 1.5%. We could have padded our pockets with that, but that wouldn’t send the right message. Our fees have never increased ever, and they won’t. If you took 1.5% on the front end and 2.5% on the back end, that’s a total of four points. Spread that across eight years. That’s 0.5% a year. I don’t know that you find much that’s going to be less than that.
That’s one thing too. Not only do you have lower fees and you get great returns, but you also take less risks than other than the other companies are out there. For example, when people ask me about oil wells, they are like, “Should we invest in these oil wells?” My thing is, I’d rather invest in a fund with multiple oil wells where you can spread out that risk a little bit versus buying into one. If that one doesn’t work out, then you’ve lost your money. You might hit big on one but lose on another. Here you do the same thing with your fund, where you spread out among many policies. People are dying all throughout, so there are returns happening all throughout.
Life settlement is designed for growth. If you want to ensure your money doesn’t go backward, you should look at this. Click To TweetThat’s a great example you give about investing in oil wells. You can invest in one or you can invest in a fund that has multiple. While I know nothing about the oil and gas business, even though I’m in Texas, I do know quite a bit about private equity business. When people come, they say, “You can invest as a part of the fund, and we own a bunch of these things.” A light bulb should go off and you should say, “I like that idea better.” Then you have to look at the detail and that’s where most people drop the ball. Where’s my money going? How much is this fund costing me in yield? The bottom line is the internal rate of return. What does the investor put in? What do they get back? When do they get it back?
We are constantly striving to fine-tune and tweak to keep it as optimized as we possibly can. We have never had a policy lapse. We have never had a policy not pay. We have never had a policy pay less than we anticipated, and we have never had a client lose one single dime in any one of our funds. Not ever. We are proud of that. We have never had to have a premium call where we ran out of premium reserve to make these premium payments because we are very conservative regarding how we allocate capital.
None of our funds carry any debt. We don’t borrow any money to make these premium payments. Everything is 100% cash, so there’s no leverage whatsoever. We don’t want any partners in terms of, we don’t want banks as a partner in this fund, they want an interest payment, or they want a percentage of the death benefit. We don’t want any partners. Everything is returned directly to the investor and that’s why we are pleased with what we do and how we do it.
High returns with low risks because people are guaranteed to die. That’s the one guarantee we do have is that people will die. Especially when it’s managed well, then it can be profitable. That’s why the returns are higher.
Here’s something that’s interesting. You may or may not know this. This investment has been around for over 100 years. It’s pretty well-known that Warren Buffett invests a significant amount of money, between $300 million and $600 million a year, in life settlements. The biggest players in this industry are other life insurance companies. They are who we compete with.
The biggest player of all is AIG. They deploy probably $5 billion to $8 billion a year buying life insurance policies from other carriers. Since 1845, no B plus or better-rated life insurance company in America has failed to pay a death benefit or an annuity claim. If they did, we have a legal reserve system that’s in place to cover it.
Unlike the legal reserve system that we have for banking, the FDIC, which has been tapped hundreds of times in the last several years. The legal reserve system for insurance companies has been tapped no times. Zero. When you make a deposit in a bank, the bank that’s called fractionalized banking, the bank only has to keep about 10% of actual cash in reserve. On the contrary, with an insurance company, they have to have 100% of the death benefit in reserve. The strongest financial institutions in the entire world, and we are very confident that our money is going to be there when someone passes.
We are running out of time here, so let’s do a quick rapid-fire. First and foremost, if somebody puts in money, what’s the minimum amount people would need to put in?
It’s $100,000. If you have someone who wants to put in less, we’ll probably take it. The standard amount is $100,000. You mentioned earlier about accredited investors that the fund is designed for accredited investors. That’s true. However, if someone is not quite accredited, but this is the right investment for them, in other words, it’s suitable and they understand it. They understand the fact that it’s not liquid.
This is not a liquidity play. This is a growth strategy. We’ll accept them if they are not accredited either. We have a lot of physicians, doctors, attorneys, business owners, and dentists that they want to grow their money. It’s in our video. We have an online PowerPoint presentation. In that, I say, “It’s not for all your money. It’s only for that money that you can’t afford to lose.”
My financial planner usually says, “If you know you are going to need it in ten years, don’t invest it. Not with us.” I’m sure you’ve got other things that are perhaps a little more risky but are going to provide cashflow. Even though the investor gets paid, we usually start in about year 4 or 5. We don’t want them to have to count on it because it’s year six. If that’s all their money that they have got to live on, I don’t want that responsibility because it’s out of my control. $100,000 is what’s stated that if you’ve got someone that wants to put in less, that’s fine. The average invested amount is about $225,000.
This is key because, like I said, “This is not a cashflow play.” We have had other investments we have talked about here where it provides monthly cashflow or at least quarterly cashflow. This is not the case. This is something that is purely growth. This is why I say IRA money or old 401(k)s and things like that you are saying, “How can I get this earned money and have a way less risk than the stock market?” Probably even beat the stock market.
Generally speaking, it depends on which period you are looking at is probably going to do that. When you look at something like this, this is a great opportunity, and this is where a lot of times I will have my clients look into. It’s like, “You got IRA money. You don’t need to create cashflow from it. You can put this money out for 8 to 10 years, and you are good.” If your premium is pretty much low 50% on, unless you’ve got other reserves or something like that, this is a good opportunity to be able to grow your money that you wouldn’t have to cash out and get penalties and taxes on.
80% to 85% of the money invested in all of our funds is IRA, Roth IRA, rollover 401(k), self-directed or solo 401(k)s, anything like that. We also have a lot of trusts. We have some fairly well-known names that I can’t mention. It’s designed for growth. If you want to make sure that your money doesn’t go backward and it’s going to be there for you. This is something that they should look at.
I agree. Thanks so much, Kevin. I appreciate your time. This has been very valuable. I’m glad we brought this up because, surprisingly, out of over 200 episodes, we have never talked about this. Thank you so much for being on here.
It’s my privilege to be with you and thank you for offering the invitation for me to come on.
You bet. Everybody, we’ll have Kevin’s website with little passcode in there for you to be able to get on their website. You’ll chat with them if you have questions and that type of thing. You want to look into this deeper. We are all here about creating that ripple effect in your lives to be able to make your life different. How cool is that if we can create more freedom and better returns with less risk? How perfect is that? Check it out. Kevin, thanks so much. Everybody, you have a wonderful and prosperous week and we’ll see you next epsiode.