Life Settlement Overview

A Life settlement occurs when an individual, typically 75 years of age or older, sells his/her Life Insurance policy to a third party for a lump sum.  The cash purchase is greater than the cash surrender value but less than the net death benefit of the policy.   The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit when the life insurance policy matures.  Investment characteristics could be described as a reverse annuity; Investor makes a series of payments (premiums) in exchange for the future payment of a lump sum (death benefit).

Uncover The TRUTH About Life Settlements

The Life Settlement industry has created many opportunities for individuals to sell, transfer or trade what has traditionally been one of their largest assets, in a secondary market place. This flexibility has changed many lives when historically, the only way to recoup any cash from a policy is through a loan or to turn the policy in for its cash surrender value which typically is much less that what the policy could be sold for on the secondary market. What once was a very illiquid market has changed. Life Settlements have become a viable alternative for retired individuals as they plan their future financial needs.

Historically, according to the actuarial consulting firm of Milliman & Robertson, 90% of all universal Life policies lapse or are surrendered back to the life insurance company prior to maturity.  Essentially, the insurance companies had created a market situation where the only option a person no longer in need of insurance company was to “sell back” the policy to the issuing company for the cash surrender value.

The Life Settlement industry has created this secondary market lessening the monopsony power of the insurance companies and creating a free market for life insurance policy owners to sell as they deem fit. Additionally, it has given accountants, financial planners and brokers another tool to utilize in the estate planning of individuals. Life Settlements represent an important option for a growing number of people who may have thought that they had no options at all but to surrender a policy. Rather than continuing to pay premiums on a policy that no longer serves its original purpose, Life Settlements offer consumers payoffs that are significantly greater than surrendering a policy.

Market Analysis

Traditional Life Settlement Market

Transactions of this type have been available for Americans since 1911. Aite Group estimates that the life settlements industry will chart a middle course, recovering from a subpar 2009 to transact approximately $13 billion annually from 2010 to 2013…”²

Generally speaking, life settlements are an option for high-net-worth policy owners age 70 or older. Independent estimates report that among this group, over 50% of policies have a market value that exceeds the cash value offered by the carrier.  Another study by Conning & Co. Research, “Life Settlements: Additional Pressure on Life Profits.” This study found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements.³

A growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial adviser.  However, FINRA cautions the consumer, “Life settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse—or for people whose life insurance needs have changed. But they are not for everyone.” 4 With this being said, those established in the industry are now placing an emphasis on life settlement education for financial professionals so that they can accurately present the life settlement option to all clients who might benefit from it.

Life Settlement Benefits to Consumer

A study of the potential of the life settlement market was conducted in 2002 by the University of Pennsylvania business school, the Wharton School. The research papers, credited to Neil Doherty and Hal Singer, were released under the title “The Benefits of a Secondary Market For Life Insurance.” 5. Pursuant to this study, which was conducted in 2002 during the very early stage of the life settlement market, life settlement providers had paid approximately $240 million to consumers for their unneeded life insurance policies, an opportunity that was not available to them just a few years earlier.  Today, consumers in the United States have received billions of dollars because of the existence of the life settlement market.