CHAPTER 1. INTRODUCTION TO LIFE SETTLEMENTS
There is one basic question we have to answer before we can go any further. That question is – what is a life settlement? Life settlements are a financial instrument that can help boost underfunded retirement savings, providing baby boomers going into retirement with a more comfortable cushion for their golden days.
Simply put, a life settlement means the sale of a life insurance policy to a buyer, often referred to as an investor. The holder or owner of the life insurance policy receives a cash payment upfront and, in exchange, transfers ownership of the life insurance policy to the buyer. The new owner then continues paying the fees and premiums on the life insurance policy until the previous owner and beneficiary of the policy passes away. They will then receives the policy’s death benefit. The reason why life settlements exist is that the investor hopes to make a profit on this transaction. In essence, the investor “bets” that the death benefit will be higher than the costs of buying the policy and paying premiums.
The seed of the life settlement industry came into being in 1911, when the Supreme Court ruled the life insurance policies are a form of private property like any other and can be bought and sold. The case was US Supreme Court case of Grigsby v. Russell, 222 U.S. 149 in 1911, and in the court’s ruling, Justice Homes laid down the law of the land when he wrote that “it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands.”
With that, life insurance became an asset that could be bought and sold.
Nevertheless, many seniors and even their financial advisors are unaware that selling a life insurance is legal or possible! Every year, over $900 billion of insurance lapses from the $20 trillion overall life insurance market. Some of that is term life insurance, which is designed to lapse, but, according to a study done at the prestigious Wharton School at the University of Pennsylvania, 88% of universal life insurance does not result in a claim, ever. And the number of life insurance unclaimed by seniors is only a little bit lower – 76% of life insurance held by seniors over the age of 65 never results in a claim, either! To put it another way – less than 1 in 4 seniors claim the life insurance benefits they have purchased. Isn’t that a waste? What’s worse is that it isn’t simply a waste – it’s a massive transfer of money from your pocket to the accounts of insurance companies. Life insurance policies often have a cash value that could be reinvested into more pressing matters, such as paying off debt, covering medical expenses or care costs, or investing in something that provides an income. Spending money by paying premiums on a life insurance policy that, statistically speaking, will probably not be claimed is a poor way to spend retirement, especially when the cash value of the policy could be put to better use.
Policies lapse for many reasons – but all lapse because circumstances change, either financial circumstances or otherwise. Here are a few examples why a policyholder might choose to lapse their life insurance policy, and what they can do instead:
- A man with a high-risk job might have purchased a policy to ensure a financial cushion for his family were anything to happen to him. Thirty years later, he might be retired, with self-sufficient children. In old age, however, healthcare and medical costs can be serious financial burdens, and instead of turning to his children for money, this man might look to let his life insurance policy lapse and not pay premiums on it anymore. This, however, could be a big mistake, as the cash value of his life insurance policy, were he to sell it in a life settlement deal, could be quite great.
- A married couple with no children might have purchased two life insurance policies, with each other as the beneficiaries. If one has passed, with the other collecting the insurance payout, the second life insurance policy remains without a beneficiary, and is, essentially, useless. One choice is to let it lapse, while another – to sell it in a life settlement and do something good with that money.
- A high-powered white-collar careerwoman might have purchased a comprehensive, universal life insurance policy several decades ago. But as she has grown older, the premiums on the policy have increased, while her income after retirement has gone down. Instead of struggling to keep the premium payments current and the policy in force, she is considering letting her life insurance policy lapse. But a much more lucrative path could be that of a life settlement.
This is why life settlements exist – to turn something that is traditionally seen as illiquid into liquid capital, to create and nurture a secondary market for situations similar to these, so that real people in such situations can benefit from selling their life insurance. It allows people to free themselves of their policy obligations, stop paying premiums, and receive a handsome sum of cash for their policy – a sum which can often be higher than the cash surrender value offered by life insurance companies for the same policy.
The Difference Between Viatical and Life Settlements
Before we move on, we should clarify the difference between life settlements and viatical settlements, which are sometimes mentioned in the same breath or unintentionally mixed up.
Viatical and life settlements, on the face of it, look very similar – and they are. The main difference between the two is that whereas life settlements are usually engaged in by people with a life expectancy of over two years, viatical settlements are situations where terminally ill people (a terminal illness is defined as a condition that grants a life expectancy of two years or less) sell their life insurance policies.
INTRODUCTION TO LIFE SETTLEMENTSCHAPTER 2.
LIFE SETTLEMENT COMPANIES – BROKERS AND PROVIDERSCHAPTER 3.
СOMMON CONCERNSCHAPTER 4.
WHO QUALIFIES FOR A LIFE SETTLEMENT?CHAPTER 5.
HOW MUCH IS MY LIFE INSURANCE POLICY WORTH?CHAPTER 6.
ALTERNATIVES TO LIFE SETTLEMENTSCHAPTER 7.
THE LIFE SETTLEMENT PROCESS