Life settlement is a term given to the legal sale of an owner’s existing life insurance policy to a third-party. Through this contract, a policyholder, in exchange for valuable consideration, is willing to transfer beneficial ownership over the policy’s death benefit to an interested buyer. The new policy owner is responsible for future premium payments until the policy matures, at which point, the death benefit is paid to the owner.
The question thus arises, why would anyone want to sell a life insurance policy, and someone is interested in buying it? Here below are some of the reasons why such a transaction may occur.
Reasons and Benefits to the Seller
In the event of economic hardship such as dealing with mounting debt, health care costs, not enough retirement income, downsizing, etc. it may prompt an owner to sell their policy. As a result, ongoing premium payments may turn existing life insurance into an unnecessary burden, which steers them towards life settlement as an attractive, and viable solution to surrendering a no longer needed policy.
Next of Kin
In general, people buy a life insurance policy as a contract in which a policy owner pays premium payments in exchange of a lump sum of money – death benefit – payable to the designated beneficiary at the time of the death. However, if the policy owner has no next of kin due to the untimely demise of their spouse, no dependents, disownment of heirs, children becoming self-sufficient, etc. they might better off selling their policies for cash.
Lack of Interest
At times for senior policyholders, the purpose of having a life insurance policy diminishes with time, which makes them look for other avenues to support their lifestyles, actively trying to live in the present not worrying about the times ahead. They understand the advantage of their policies as valuable assets that can be traded for additional cash flow.
Emergency Needs in Times of Crisis
Senior citizens are the highest risk group that have been the most affected by the COVID-19 pandemic. Health care has become the utmost priority for them. In some cases, the elderly was in the possession of limited savings, low retirement income, and unable to cover their medical costs.
In such times of crisis, policyholders were forced to make difficult decisions, to search for additional funds with minimum market volatility.
No More Hassle to Pay Premiums
Previously, if an individual possessed a life insurance policy that they no longer needed, the only option available to them was to either A) surrender the policy for its cash surrender value or B) allow it to lapse – a term given to a cessation of an insurance policy, when an individual fails to pay their premiums.
With life settlements, owners have now a third option to sell their life insurance policy for a greater than “surrender value” amount to reap the maximum available benefits.
Reasons and Benefits to the Buyer
Low Risk of Market Volatility
Investors who have obtained Life Settlement Contracts aka Mortality Linked Investment Contracts experience the prior policy owner benefits. An uncorrelated asset class with only one major risk can provide a broader diversification for their investment portfolios while being a stabilizing tool in times of financial market volatility.
In recent years Life Settlement market has become highly regulated, with 43 US states having comprehensive life settlement guidelines in place that protect the consumer rights of both buyers and sellers of life insurance policies.
Increased Opportunities for Buyers
Life settlement is a bona fide “alternative” asset class, vetted through an industrious process that is longevity – contingent. Moreover, as the Baby Boomers generation are entering the phase of retirement, this may arise interest in investors who can see potential in this investment, as respective seniors may have a cause to sell their unneeded life insurance policies.
In conclusion, a life settlement transaction is a mutually beneficial, win-win situation for both parties involved. Senior insureds can now turn their unwanted policies to lump sum cash value. At the same time, investors can diversify their investment portfolio through life settlement as an alternative option.