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A Life Settlement is the sale of an existing life insurance policy. The funds generated are often significantly greater than the policy's cash surrender value. Often, the original planning needs have changed so that the policy is no longer needed. Premiums may have become a burden and the original policy owner may want to eliminate the life insurance policy by letting it lapse. Now, there is an alternative. The policy owner may sell their policy just as they would sell a stock or bond, or even their home.
This secondary market gives the policy owner a market that did not exist in the past. In prior years, the policy owner was left with only one entity to deal with – their issuing carrier. This exciting alternative allows the policy owner to obtain competitive institutional pricing for this valued asset.
I Never Knew that an Insurance Policy Could Be Sold…
…You’re not alone!
For years, policy owners viewed their life insurance policies as assets that had no significant cash value to them, instead offering benefit solely to their beneficiaries. Consequently, coverage was obtained, premiums paid and policies tucked away for safekeeping without any thought of the significant current value that they held.
Fortunately for these policy owners, the Supreme Court held a different view of life insurance policies. In 1911, the Court ruled that life insurance policies were freely assignable for value. In other words, life insurance policies could be sold just like any other asset. However, it wasn’t until the late 1990s that Life Settlements started to take off – ending the life insurance companies’ monopoly power over the repurchase of their own issued policies for pennies on the dollar.
History of the Life Settlement Industry
The market opportunity exists primarily because life insurance companies typically pay low surrender values when a policy owner decides to redeem or cash in the policy. The surrender values are usually so low that Life Settlements are often four times greater on average. The inefficiency in insurer-paid cash surrender values provides policy sellers with a great, new alternative source of liquidity and buyers with the opportunity for above-market returns.
Life Settlements significantly differ from viatical settlements in two distinct respects: insured eligibility and policy characteristics. A typical viatical policy is classified as one where the insured has a life expectancy less than two years and is terminally ill. By contrast, in a Life Settlement, the insured may be in moderate or even good health, with a life expectancy in excess of two years. The face value of a typical policy sold through a Life Settlement tends to be larger. In most cases, the policy must have been issued at least two years prior to the Life Settlement transaction.
Life Settlements are based on actuarial results related to a population that typically includes individuals with life expectancies in the range of 2 to 12 years, which reduces the standard deviation. Life insurance is a time-value instrument with the unknown element of individual term. Regardless, using statistical probability, the average life expectancy of a senior pool can be projected with reasonable accuracy.
Life Settlement Benefits
This new service offers you and your client an opportunity to benefit from a wasting or wasted asset. Many Life Settlement transactions generate substantial capital, thus creating the need for additional financial products or services your firm may provide. The Life Settlement solution is typically the “Win-Win” scenario that you have been looking for.
What is a Life Settlement?
A Life Settlement is a sensible financial tool available to individuals, trusts, charities and businesses who want to convert their unwanted life insurance policies to cash. Typically, large banks or institutions are the buyers of these policies. Once they purchase your policy and pay you a one-time cash settlement, they become the owners and beneficiaries of the policy, take over the future premium payments and release you from any financial obligations.
Major Wall Street institutions such as Citibank, UBS, Goldman Sachs, Deutsche Bank, AIG and Credit Suisse are just a few of the many who participate in the Life Settlements market.
Life Settlement amounts can typically range between 20% and 40% of a life policy’s face amount/death benefit. Some settlements are less and others much more – always dependent upon the type of policy and the insured’s health at the time of the settlement. When compared to cash surrender values offered by the insurance carrier for the same policy, Life Settlements are generally much greater.