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Deeper Dive into Life Settlements
Let’s look into Life Insurance Settlements
Life insurance is one of the most widely utilized financial products in the United States. As of 2020, there were more than 180 million individual life insurance policies insuring U.S. citizens with a total face value of over $10 Trillion. Additionally, group life insurance accounts for another 113 million policies valued at more than $7 Trillion.
Considering those statistics, it is fair to say that the importance of owning a life insurance policy to provide financial security for our loved ones is embedded in the financial plan of Americans. However, there is a little known fact about lapse rates that life insurance companies do not want to publicize. According to the Life Insurance Settlement Association, “an estimated 90% of all life insurance policies issued lapse before paying a claim.”
While many of these life insurance consumers lapse or surrender a policy that holds little to no present day economic value, some Americans may have walked away from a valuable asset worth a significant sum of cash. Unfortunately, these consumers were unaware that a fair market value may have been available for their life insurance policy through a state regulated secondary market called life settlements. This secondary market for life insurance policies provides qualified policyholders with an alternative option other than those offered by the life insurance company.
Life Settlements are about CHOICE – and that choice is now in the hands of the American consumer instead of the life insurance company.
What is a Life Settlement?
A life settlement enables qualified life insurance policyholders to convert their life insurance coverage into cash by selling it to a state licensed financial institution. The sale of the policy is similar to the sale of a home or car, all rights, title and future interest in the asset are legally transferred from the seller to the buyer. The buyer is then responsible for all future premium payments and owns the rights to the future death benefit. These buyers are part of a secondary market for life insurance policies that developed due to the limited options offered by life insurance companies for those consumers who have had changing life circumstances or who could no longer afford their premiums. Life settlements give consumers a choice, when previously only limited options existed which were dictated by the life insurance company. Now, thanks to the Life Settlement Industry, policyholders have the choice to sell their asset for a fair market value, instead of lapsing a policy with no value received or surrendering it for an amount below fair market value. The life settlement option allows the seller of the policy to use the proceeds to help pay for long-term care needs, living expenses or anything else they desire.
Over the past decade, thousands of Americans have taken advantage of this new financial option. According to a 2010 Life Settlement Study conducted by the U.S Government Accountability Office, between 2006 – 2009 life settlements provided consumers with $5.62 Billion more cash than the comparable amount offered by the life insurance company. An average of 800% more value!
Are life settlements regulated?
Yes, life settlements are a highly regulated market that requires life settlement brokers and providers (buyers) to be licensed on a state-by-state basis. Consumer protections have been passed in more than 45 states and are typically regulated by the State Department of Insurance.
How does a life insurance policy have a market value?
Typically, life insurance policies are issued when the insured was in good health. As years go by, many people have a change in health, and in some cases, serious health conditions may develop. Older Americans or others who have been diagnosed with life threatening diseases are seldom informed that this health change may have created a significant secondary market value for their policy.
While this life insurance equity sits unknown to the policy owner, maintaining the life insurance coverage may no longer be as important as it once was due to changing circumstances in life; children have grown older, assets were disbursed or have diminished, living expenses have increased and health care costs have skyrocketed. In the past, because most people were unaware of this hidden value in their life insurance policy, the life insurance coverage may have lapsed or been surrendered for a low cash surrender value. Unfortunately, the surrender value does not account for a change in health because life insurance companies are not required to, and have no incentive to, pay a policyholder for this built up equity. That is precisely why the life settlement industry exists – to provide consumers with a better financial option.
Who buys life insurance policies in the secondary market?
The companies that purchase life insurance policies in the secondary market are called life settlement providers. These companies must be licensed by the Department of Insurance in your home state. Non-licensed investors may not have the proper consumer privacy and confidentiality protections in place. Providers represent institutional investors such as investment banks, multi-national banks, international corporations, pension funds, hedge funds, mutual funds and other major financial institutions – including life insurance companies and reinsurers – who are investing in life insurance policies through life settlement funds.