Life Settlements have been around for many years. A Life Settlement is when an insured sells an insurance policy that is either no longer needed or has become too expensive. Many insureds with convertible term insurance policies find themselves in the position of having to convert their policy to a permanent type of insurance. With older insureds the premium can increase as much as 10 fold. If the cost of the converted policy is beyond the means of the insured a Life Settlement can be an excellent choice.
Simply put, the buyer of life insurance policy exchanges cash for a policy then takes on the financial obligation of paying premiums until the policy matures. Most purchasers of policies are institutional investors or private equity funds.
Who gets what in the transaction? The seller of the policy receives funds that can be used for anything they would like. In today’s financial environment the proceeds are in many cases used to supplement the insured’s retirement or pay for long term health care. Many times the only choice an insured has is to lapse the policy. In that event the insured receives nothing. When the policy contains cash value the minimum a seller would receive would be the cash value if an offer was made on the case. The purchaser would most likely pay a premium above the cash value for the policy.
The insured and the Funder are financially protected through the use of an Escrow Agent. Policy ownership will not change hands until after the Escrow Agent has received the funds to needed to “settle” the transaction. In short, the Funder and the Seller have a simultaneous transaction in which each receives what they have agreed to.
Not all policies are candidates for Life Settlements. Generally policies with an insured over the age of 70 with health impairments stand the best chance of an offer being made.
The Funder (purchaser) receives a policy that will require premiums to be paid for an unspecified period of time. The Funder provides liquidity in an otherwise illiquid asset.
The sale of a life insurance policy can be a safe effective tool for many people to overcome the financial worries they might be facing today. Due Diligence in the sale of a life insurance policy cannot be stressed enough. It is possible for an insured to sell a policy on their but working with an experienced Life Settlement broker, knowledgeable in the industry, will facilitate the seller receiving the best financial outcome possible.