Over the last few years the secondary market for life insurance policies has been growing at an exponential rate, and there is little wonder why. In a time where financial stability is harder to come by, the recent emergence of so-called life settlements seems inevitable. On one side are the life insurance policy holders in need of quick cash or who want to get rid of an unwanted policy; on the other side are investors hungry for a safe investment that has the potential for high returns.
Whether you are a life insurance policy holder who is considering selling your policy or an individual looking for a good investment opportunity, here is a brief rundown on life settlements.
There are actually several reasons why policy holders would choose to sell their life insurance policies:
The life insurance settlement market is basically an outgrowth of the viaticals market of the 80’s and early 90’s. In those days the AIDS epidemic was in full swing. Many of those diagnosed with the disease sold their life insurance policies to investors for quick cash to pay for medical and living expenses. These investors were then made the beneficiaries of the policy at maturation.
The viaticals market declined over time as AIDS patients and other terminally ill individuals started living longer due to advances in technology. Those looking to make a quick buck turned to fraud and corruption just as quickly, and the market disintegrated.
But it wasn't long before investors got smart and figured out how to make money on the life insurance policies of older people who are not terminally ill.
Enter the life settlement market. With a life settlement, the policy owner, typically an elderly person 65 years or older, gives an unwanted life insurance policy over to a life settlement broker. In return, the original owner of the life insurance policy receives significantly more than the policy's cash surrender value. The life settlement broker then sells these policies to hedge funds or investment banks who become the beneficiaries of the policy and are responsible for covering all the premium payments.
Suppose, for example, you are a 65 year old with a $1 million life insurance policy that you want to unload. A life settlement company may offer you around $500,000, which is much more than you would get by simply cashing in the policy. After you die the investor would then get the full payout of $1 million.
The issue of life settlements begins to enter murky waters with insurable interest. When it comes to life insurance, a person is deemed to have an insurable interest when he has a reasonable expectation of profit or benefit from the continued life of the insured. This generally includes spouses, children, and key business partners or employees. The main point in maintaining the insurable interest requirement, is to prevent people from purchasing life insurance policies and then killing the insured in order to cash in on the death benefit.
Now, everyone is considered to have an insurable interest in their own lives, and it is assumed that the insured person would name as a beneficiaries only those people who would have an interest in him living a long and healthy life. Moreover, though state law requires that an insurable interest exist when applying for a life insurance policy, it no longer applies once the policy has been purchased so long as the premiums are being paid. Therefore, the beneficiaries of these policies themselves do not need to have an insurable interest. All this raises the question of if you trust the person or outfit who may end up owning your policy.
Aside from the fact that the beneficiary does not need to have an insurable interest in the insured, most insurance policies cannot be canceled by the insurance company after 2 years as long as the premiums are being paid. These two aspects of life insurance are what allow for the existence of life settlements. And the truth is that life settlements can be beneficial to those who can no longer maintain their policy and those looking for a good investment.
Anyone interested in selling their life insurance policy, however, should beware. Prior to selling your policy, an attorney or financial advisor should be consulted to ensure that your decision makes financial sense and that the terms and conditions are in your best interest.This article is brought to you by The 'Lectric Law Library and LookOnBusiness.LookOnBusiness provides essential news, information and resources pertaining to financing, currency and small business related topics. More information on these topics can be obtained by visiting their website at LookOnBusiness.com or e-mailing [email protected]