Life Settlements
Most of us have made the responsible decision to purchase a life insurance policy to protect our spouse and/or children in case of an accident. In fact, 7 in 10 Americans have some form of life insurance. But many seniors reach a point where they feel life insurance is no longer necessary. Often, it’s because their kids are grown and self-sufficient. Other times, they encounter unexpected financial needs (often medical) and need up-front cash. The answer might be life settlements.
What are Life Settlements?
Life settlements (sometimes known as a viatical settlements or senior settlements) involve the sale a life insurance policy by the policy holder (before death) to a third party. The transaction is done through the secondary market where the policy owner typically receives a lump sum cash payment from the third party. The third party buyer pays all future premiums and eventually receives the death benefit.
Many life insurance policy holders still don’t realize they can sell their policies for cash. A recent study by Coventry revealed that over 86% of Americans didn’t know they could sell their life insurance policy for an immediate cash payment. Americans aged 65 or older leave more than $100 billion in benefits on the table each year by lapsing or surrendering In a typical life settlement transaction, the life insurance policy owner is over the age of 65.
Why Consider Life Settlements?
There are several reasons why a policy holder might consider selling their life insurance policy via a life settlement. They can be generally characterized into a couple categories:
You Simply Don’t Need it Anymore
Often, people buy life insurance to replace lost income in the event of the insured’s death. In the case of a retiree
You Simply Can’t Afford it Anymore
Life insurance premiums can be costly, especially in the midst of an unforeseen financial complication. A life or viatical settlement Given all the other financial needs battling for your limited resources (high interest credit card debt, student loans, long-term care, a sudden medical emergency) the cost of a premium
You can use the proceeds from a life settlement to consolidate Given the rising costs of health care, education and real estate, having adequate cash on hand is very reassuring.
Finally, worrying about a future benefit from an insurance company with poor financial strength can be discomforting. A life settlement is a consideration if you are in a financial bind.
The amount received is always in excess of the policy’s cash surrender value but less than the death benefit value. A 2010 US Government Accountability Office (GAO) study revealed “U.S. policy holders received 4-8 times more than the policy cash surrender values from life settlements from 2006-2009.”
A 2010 US Government Accountability Office (GAO) study revealed “U.S. policy holders received 4-8 times more than the policy cash surrender values from life settlements from 2006-2009.”
Ultimately, the amount of cash you receive depends on different factors including the death benefit value of the policy, the remaining expected life of the insured and the required rate of return of the life insurance policy buyer.
Often, the third party buyers are alternative finance companies who pool the life insurance policies together as an investment. Currently, investors in pools of Life settlements may enjoy high-double digit returns, a nice alternative to anemic global interest rates. But required rates of return will vary with interest rate changes and the performance of financial markets and overall economic conditions.
A Quick History of Life Settlements
The landmark 1911 U.S. Supreme Court case, Grigsby v. Russell ruled that life insurance policies are assets. This is important for the future life settlement industry because the policies became freely assignable for value.
In the 1980s, the secondary market for life insurance policies, allowed many terminally ill AIDS patients sell their life insurance policies for much needed funds. The proceeds from these viatical settlements maximized their quality of life by providing necessary medical treatment.
The more commercial uses of life settlements in the United States began in the late 1990s when seniors became increasingly aware of the option to sell unneeded life insurance policies (perhaps their children had grown and were self-sufficient, etc.) with life settlements. Previously, many believed their only options were cash surrender or letting the policies lapse.
By 2008, the value of life settlements had grown to an estimated $12 billion (face policy values sold) up from $5 billion just three years earlier, a compounded annual growth rate of
2009
The financial crisis spooked investors looking to purchase life insurance policies in the secondary market. This lack of demand from buyers of life insurance policies led to a severe retrenchment in life settlement activity.
By 2013, the life settlement company was slowly making a comeback from the financial crisis. Warren Buffett’s Berkshire Hathaway returned to the life insurance policy buying market after a seven year hiatus. The investment company bought $300 million worth of life insurance policies (face value).
2014-2023
The life settlement industry is expected to continue its robust growth. In 2014, Conning & Company forecasted average annual volume of life settlements of around $3 billion per year over the next decade.9
Why Include Life Settlements on this Site?
Products purchased by Americans from insurance companies make up a significant portion of retirement savings. According to the American Council of Life Insurers, one in 5 dollars We want the customers who have bought any type of insurance products to understand the options available to them. This is why we felt the urgency to include life settlements on the Sell My Annuity Guide site.
Life insurance policies are another product subject to the credit-worthiness of the issuing insurer, joining annuities, structured settlements and even pensions (assuming an insurance company did a pension buyout). While it is rare that an insurance company goes bankrupt, Further,
Another reason life settlements are included is the illiquid nature of the product. It has a basic similarity to some annuities in that the financial cash flow/benefit comes in the future and a significant amount of value is locked up in the meantime. Selling an annuity, structured settlements and life settlements offer access to a lump sum of immediate cash.
If you’re still on the fence about pursuing a life settlement you may be able to still retain a portion of your coverage while lowering your monthly premium payments if you find yourself in a cash-flow crunch. There is also the option of a life insurance loan.
http://www.lisa.org/consumer-advisors/life-settlement-basics/defining-life-settlements
http://www.lisa.org/industry-resources/life-settlement-industry-timeline
https://www.irs.gov/pub/irs-drop/rr-09-13.pdf
http://www.limra.com/Research/Abstracts_Public/2014/130917-01.aspx?research_id=10737432296
http://www.barrons.com/articles/barrons-top-50-annuities-1403333975