WHAT ARE LIFE SETTLEMENTS
According to the Life Insurance Settlement Association (LISA), “A life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. There are a number of reasons that a policy owner may choose to sell his or her life insurance policy. The policy owner may no longer need or want his or her policy, he or she may wish to purchase a different kind of life insurance policy, or premium payments may no longer be affordable.”
A number of factors are expected to increase the demand for life settlements, especially the large numbers of aging baby boomers seeking to optimize the cash value for unwanted life insurance policies. In addition, other economic factors are expected to drive an increase in activity, including the impending long term care crisis as millions of financially strapped senior consumers seek ways to finance nursing home care.
Life settlements are considered by many professional advisors and senior consumers as an innovative financial and estate planning tool. The transaction requires the involvement of a professional brokerage firms that facilitate the sale of the policy to institutional investors for approximately three to five times the policy’s cash surrender value.
Although Life Insurance Settlements are relatively new, it is a rapidly growing service. The service is for sellers who do not want the insurance policy or can no longer manage to pay the premium payments. More and more senior’s can potentially reap the benefits of this product. As stated by the American Council of Life Insurers, almost nine out of ten universal life insurance policies are expired or surrendered. In addition, it is claimed that 99% of term life insurance plans are lapsed without actually paying out a death benefit. Life insurance settlements’ benefit is that the insured person generally gets a lump-sum settlement that is greater than the policy’s cash surrender value, however it is lower than the expected payment in case of death.
In the end it is a win-win situation and, when done efficiently and according to industry best practices it is a great opportunity for everyone involved:
- The life insurance policy seller gets a substantial settlement greater than the surrender value for an unwanted insurance policy.
- The life insurance policy buyer has a valuable contract with a life insurance provider that will pay out a death benefit at some point in the future.
- The insurance company proceeds to collect premiums, which are paid by the buyer.