What is a Life Insurance Settlement?


what is a life settlement

A Life Insurance Settlement is a financial transaction where investors buy an existing in force life insurance policy, and thereby the right to collect the death benefit when the insured dies. Investors pay the purchase price to the original policy owners and then assume responsibility for all of the ongoing policy premiums.

Over the last few years a very large investment market in life settlements has emerged. Owning life insurance is actually a form of investment, and the return on that investment is the death benefit paid to the policy's beneficiaries. Historically a life insurance policy is one of the most reliable investments available anywhere, because the death benefit is guaranteed by the full faith and credit of very highly rated institutions with many billions in assets.

The emergence of the life settlement market is without doubt one of the most exciting and fundamental changes to the life insurance industry in over 150 years. Life Settlements are truly a win-win transaction for both the policy owners that sell the policy, and for the investors that buy them.

Thus, life settlements have completely transformed how seniors view buying, owning and the possibility of re-selling life insurance.

A life settlement is NOT the same as a viatical settlement. In a viatical settlement the insured is ill and has a terminal diagnosis. Therefore, viaticals settlements are frequently arranged under the duress of illness, medical bills and the anticipation of death. Life settlements are voluntary and only done with insureds that are under no particular duress and have life expectancies of less than 20 years.

Life settlement investors are major Wall Street institutions like Goldman, Sachs or Merryl Lynch. They buy large numbers of individual policies as they provide an excellent and very safe rate of return. They buy policies of all sizes above $50,000 in face coverage, all the way up to policies with tens of millions in face amount. The amount received for selling a life policy in a life settlement range from just a few percent of the face amount up to over 40% of the face amount.


Who Can Sell their Life Insurance in a Life Settlement?

Often the term "Senior" settlement is used to refer to a life settlement. This is due to the fact that only people over the age of 65 and more commonly over the age of 70 are able to sell their life insurance policies. The key is the calculated life expectancy of the insured. Investors will only buy policies covering insureds with LEs (life expectancies) less than 20 years.

Historically, insurance industry statistics have shown that, up to 90% of new life insurance policies ultimately do not pay the death benefits. When policy holders wished to exit a life policy while they are still alive, for the most part, there were only 2 options available:

  1. Stop paying premiums and the policy would lapse sooner or later with no value making all the premium paid a total loss.
    OR
  2. If there was cash value, surrender the policy back to the issuing company for a cash sum that in most cases was far less than premiums paid.

Now, there is a 3rd and potentially very profitable option for seniors to exit from unwanted life insurance. Sell that policy in a life settlement on the secondary life insurance market.


Who are the investors that buy Life Settlements?

The following is a very short list of well known institutional life settlement investors:

Goldman, Sachs & Co, Merrill Lynch, Credit Suisse, HSBC, Royal Bank of Scotland, Deutch Bank, AIG Group. Even the legendary Warren Buffet has been a life settlement investor.


About the author:

David Mickelson, ChFC, AEP is an expert in wealth strategies for seniors. He has helped hundreds of seniors with life insurance, life settlements, and all aspects of estate planning.





Life Insurance for Sale

American seniors with life insurance may be able to sell those policies to investors for large cash payments. A secondary market for Life Insurance has emerged in the last few years that is changing the ways seniors plan for their retirement. Once a sunk cost Life Insurance is now an asset they can value and sell just like real estate or stocks and bonds.



Links

Learn how experts help seniors make money from their Life Insurance.

Understand the Life Settlement process.