In a life insurance settlement transaction, a policyholder sells his or her life insurance to a buyer in exchange for a one-time payment. The amount of the payment from the buyer to the policyholder is typically less than the overall death benefit on the insurance policy, but more than the real cash surrender value.
The investor then maintains the policy, pays additional policy costs or premiums, and collects the death benefit when the insured passes. The investor considered the insured life expectancy and the terms and conditions of the insurance policy.
Why Would Someone Want To Sell Their Policy?
The policyholder may no longer require the policy, he or she may want to buy a different kind of life insurance policy, or the premium payments may no longer be affordable.
How Are Life Settlements Possible?
A life insurance policy is a transferable property that has specific legal rights including the right to: change the beneficiary designation, name the policy beneficiary, assign the policy as a collateral loan, sell the policy to another party or borrow against the policy.
Therefore, it is possible to reassign the various parts of the life insurance contract.
What Is The Process Involved In Beginning A Life Settlement?
- Application: involves the user’s basic information on the policy and the signing of release forms for additional discovery.
- Review: the life settlement provider determines whether or not they want to buy your policy and what they are willing to pay.
- Offer: the offer may be negotiable, and both parties have the right to walk away from the transaction if they are not satisfied.
- Closing package: some of the common documents in the closing package involve a letter of competency (LOC), life settlement contract, verification of coverage (VOC), life expectancy reports, change of beneficiary form (COB), and Change of ownership form (COO).
- Funds transfer: the funds can be transferred from the buyer to the seller through a single direct deposit, or a series of payments over a predetermined period.
What Is The Cash Surrender Value?
The cash surrender value is also identified as the cash value in the amount of money offered to the policyholder in exchange for part of all of their insurance policy’s value. The cash value is determined by ascertaining the savings component accumulated with every premium payment. When the owner opts to terminate their life insurance contract before the end of the term period, they can receive the cash value or accumulated savings rather than the death settlement.
How Long Have Life Settlements Been Around?
A supreme court determination dating back to 1911 delivered by Justice Oliver Wendel Holmes Jr, dictates the majority judgment that would lay the foundation for life settlements. It was noted that life insurance has grown into a recognized form of investment and self compelled savings. Therefore, life insurance policies were given an ordinary characteristic of the property. There is no need to deny anyone the right to sell except to persons having such interest to diminish appreciably the value of the contract in the owner’s hand.
Do Life Settlements Belong in Your Portfolio?
Life settlements offer attractive rates of return. While past returns are not indicative of future returns and there are always risks in vetting, life settlements funds produce gains consistently, ranging from low double digits to mid-single-digit annualized returns.
Life settlements offer safety and stability. The returns are not tied to the performance of the stock market, interest rates, housing market, politics, or any other external factor. The underlying insurance policies are typically rated life insurance organizations with known stability.
It is a true win-win venture. Seniors that no longer need life insurance policies can surrender them in exchange for the cash value. They can sell the benefits for more. The investors and the seniors who sell their policies both benefit.
How Can I Invest In Life Settlements?
You can invest through the direct purchase of life insurance policies. This requires a large outlay of cash as well as expertise. You can as well invest through direct fractional life settlements in which larger insurance policies are fragmented into smaller divisions and sold separately to the investors. You can obtain life settlements through a life settlement private equity fund in which an investor purchases only one or two policies, their return will be less predictable.
Are There Disadvantages To Investing In Life Settlements?
Yes, a major disadvantage is that they are not simply available to most investors. Life settlement regulations are too tight. Direct or fractional policies can only be sold to accredited investors.
If Life Settlements Are So Great, Why Haven’t I Heard Of Them?
Many financial advisors are not aware of the true alternative investments. Typically, many have limited options as far as the types of investments they sell. Most brokers and advisors lack information about the ones they are allowed to sell outside of what their brokerage firm can offer.