Why The Life Insurance Settlement Is Becoming More And More Popular
A life insurance settlement is the transfer of ownership of a life insurance policy, usually by sale, from the original owner, usually to a life settlement company. In some cases, such a transfer may be made through a life settlement broker. Most of the policyholders who sell policies in a life settlement are older and well-off. The sale of a life insurance policy of a policyholder who’s been diagnosed as having a catastrophic disease or terminal condition and has a life expectancy of less than two years is called a viatical settlement.
Life insurance settlements pay the seller an amount greater than the policy’s cash surrender value, but less than its face value. The purchaser of the policy – the life settlement company – is responsible for all ongoing premium payments and will receive the death benefit upon the death of the insured.
There are many reasons a person might consider a life settlement. For instance, the policy may no longer be necessary (e.g., if a life insurance policy was purchased to provide a lump sum payment to someone, and that person dies, the policyholder may not want to continue the policy. The premium being paid may have become unaffordable to the policyholder, or the policyholder’s life circumstances may have changed (for example, due to a spouse’s death).
The reason that life settlement companies exist, and these sales are made, is that when policyholders surrender life insurance policies to the issuing insurance company, they receive a very low payment which is often significantly below market value – an actuarial calculation which considers the policyholder’s age, medical condition and life expectancy, and also the policy’s death benefit, premium and account value, and financial condition of the issuing insurance company. Life settlement companies offer policy-owners an amount much closer to the actual market value of the policy.
A life settlement can be a win-win proposition: in exchange for a life insurance policy that’s no longer wanted, the policy-owner receives a lump sum of money larger than the insurance company’s surrender value. The life settlement company, in exchange for a substantial immediate payment and continued premium payments for the life of the insured, stands to reap a dramatic profit at some point in the future. There is a loser, though: the insurance company that issued the policy. From the insurance company’s perspective, if the life settlement transaction hadn’t taken place, then the policyholder would have surrendered the policy for the surrender value – a much lower amount than the death benefit.
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It’s also BIG money on wall street these days. Goldman Sachs was developing an index of life settlements for trade on the open market but I don’t know how far they got or whether the latest fraud suit filed by the SEC against GS is going to affect their involvement in life settlements since they can be somewhat murky water, not unlike sub-prime mortgages…
There are other losers in this mix. For one, there are seniors who may be taken advantage of by the settlement company. For another, there are all the other people paying for life insurance policies. When the insurers start losing too much money from payouts to the settlement companies, they’ll likely jack up the premiums to compensate for the increased risk that they will have to pay out…
I am not sure I see where the losers come in to play, unless it is from a “lack of knowlege” perspective. If a person can settle a policy for a portion of the face, greater then the cash value, or completely losing the coverage if the term is expiring when the coverage can be converted, but premiums are unaffordable for the insured. If you have a company that will take over the premiums, giving the insured the freedom of finacial stability and the freedom to secure more or other coverage – who is losing? The insurance company sells more coverage, the agent get multiple commissions, the insured gets cash and freedom. Who is losing again?