The insurance industry has always enjoyed a monopsony in economic terms. A monopsony is somewhat the opposite of a monopoly. A monopoly is one seller and they could potentially control the market and gouge sales pricing. A monopsony is only one buyer and they could in essence be purchasing for a much lower price than a free market would allow. When a consumer surrenders a life insurance policy, they are in essence taking the only offer available to them for their life insurance policy. Life settlement providers in the secondary market for life insurance offer additional buyers, other than the original life insurance company. Consumers now have the ability to receive a greater value for their insurance policy if they qualify. That is primarily why there is a secondary market for life insurance. A simple example is whole life insurance. The cash surrender value is essentially the same amount as the policy reserve. That reserve equates to the potential of the benefits promised under the policy over the unpaid premiums that are to be collected.
So if someone has a new policy issued, the reserve is zero, since the benefit to be collected and the premiums to be paid are equal on Whole Life. If someone’s health slides after the issuance of their insurance policy; the expected payout will now be more than the anticipated premiums, all else equal. That creates value in the policy that can be quantified and positioned to benefit the consumer either in a lump sum or in payments to their care provider.
With accelerated death benefits, an insured whose policy has provisions for the payment of such benefits and who meets the insurance companies requirements, which is usually a life expectancy of a year or less can get some or all of the policy’s death benefit advanced. In many cases where life expectancies are over 24 months, policy holders cannot obtain accelerated death benefits. The secondary market for life insurance policies may offer consumers substantially improved liquidity by providing cash settlements that are more in line with the policy’s actual value