A life settlement, or senior settlement, as they are sometimes called, involves selling an existing life insurance policy to a third party—a person or an entity other than the company that issued the policy—for more than the policy’s cash surrender value, but less than the net death benefit.
The purchasers become the new owners and beneficiaries for the death benefits of these purchased policies. They also take over paying the premiums. This is a legitimate investment in the death of another person. The investor will pay the insured 20% to 80% of the face value of the policy depending on the age and health of the seller.
Over the years, life settlements have become a major niche business. Investor alliances or companies that represent investors evaluate and place bids on life insurance policies for sale. These are called life settlement providers. As a general rule, they are not interested in policies less than $100,000 in face value and would prefer much larger policies. On the other hand, investors will take smaller policies under certain conditions or aggregate the purchase of numerous smaller policies on the same person.
These companies will not buy term insurance unless the insurance policy has an option to convert to whole life. They are primarily looking for policies that were bought years earlier for estate planning purposes but no longer fit that need. Many of these policies have become extremely expensive for the policyholder and rather than surrender the policies for their cash value, policyholders can often get more through a life settlement.
Life settlements are also arranged through brokers who will shop for bids through a number of life settlement providers. Brokers retain a fee for their services.
Investors in life settlements could be individuals who are using their own capital to purchase policies. Investors could also be investment firms that are raising cash for buying policies from individual investors directly or indirectly through bond issues called appropriately “death bonds.”
Life insurance companies do not like life settlements. Insurance companies have set premiums based on certain actuarial assumptions, one of which is that a certain number of policies will be surrendered for cash or lapsed. A life settlement causes the policy to stay in force up to the death of the insured. This means that life insurance companies will be paying more death benefits than they intended. This responsibility for more death benefits could mean that insurance companies lose profit or even lose money.
Some unscrupulous insurance agents will find a policy that is no longer affordable but has a value in a life settlement. This money is then used to purchase a new life insurance policy that, based on projections, is more affordable. This practice may generate great commissions for the agent but may not always be in the best interest of the client. Often times, the client can reduce coverage, borrow from the policy or use the cash value to cover the cost of the insurance.
In addition to using a life settlement here are some other ways that life insurance can payout while the person who owns it is still alive.
- Borrow against the cash value of the life insurance policy.
- Instruct the life insurance carrier to cash out the policy, based on the available cash surrender value.
- Determine if the life insurance carrier offers an “accelerated benefits program” rider and if the insured is eligible.
- Borrow from friends or family using the life insurance policy as collateral to secure the loan.
If you are in need of estate planning advice and legal services, contact an estate planning attorney to discuss your case. At King Law, we offer estate planning services. Come visit us at one of our multiple office locations in North and South Carolina.