Life seldom works out as you plan. You may have gone to college in Boston to become a lawyer and wound up running a restaurant in San Francisco. You may have thought you would never get married, but now are living in the suburbs with a family of four. If you bought a life insurance policy somewhere along the way, that policy may be worth a great deal of money today as an insurance settlement.
Life Settlement Providers
A life settlement provider may be able to help you convert your policy to cash. Life settlement providers are companies, or sometimes individuals, who operate in the secondary market for insurance. You should not confuse them with life insurance companies. They are in the business of aggregating and buying policies and do not have any fiduciary relationship with their clients.
In order to be able to sell your policy to a life settlement provider, and get the money you need, your policy must be attractive enough for the provider to want to make you an offer. When you qualify for a life settlement and decide to sell your policy, you are giving up ownership in the policy. In exchange for a lump sum payment, the life settlements provider becomes the sole beneficiary of the policy.
While the guidelines may be slightly different based on which life settlement provider you select, it is a fair statement to say that in order to qualify, you must have a major slippage in health which results in a fairly dramatic reduction of your life expectancy. It is not necessary for you to be terminally ill to qualify for a life settlement. Use the life settlement calculator to estimate the value of your life insurance policy as a life settlement or viatical.
Backgrounds and Life Insurance Settlement Providers
A life settlement provider will want to know some things about you and your life insurance policy. First of all, because your health is a major factor in determining the potential value of your policy, the provider may want to review all of your medical records, get reports from doctors and consult actuarial charts to determine your life expectancy. Second, the provider will want to know the amount of your death benefit and if there are any loans against the policy. Your policy needs to be valued before an offer can be made.
A person may have a number of different reasons for wanting to sell their policy. Assuming you meet the conditions to qualify for a life settlement, you may want to make a deal because you have high out of pocket medical costs due to your declining health. The money you receive could be applied to pay for home health care to help you with your basic needs such as bathing or preparing meals.
You can also use the proceeds from a life settlement to take a trip across the country to visit family before your condition deteriorates to the point where you can no longer travel. If you are 95 but still spry, you will likely qualify for a life settlement and then you can use the money to try to do everything on your bucket list.
When life circumstances change, having a life insurance policy can be a real blessing. Why not get your policy valued and see if a life settlement provider can help you?
What are the risk factors for life settlement investments?
Life settlements bring together a willing seller and a willing buyer. As the policy owner, or seller of the life insurance policy, you know exactly what you are getting. When you negotiate and agree to a settlement with the life settlement provider, you receive an agreed amount in the form of a single lump sum. As the buyer of the policy, a life settlement company is making an educated guess on the rate of return they will realize when the insured dies and they can collect the death benefit.
The rate of return on life settlement investments can be affected by a number of different variables. You should understand each of those risks before you make the decision to invest in life settlements.
The insured lives longer than expected
Calculating the life expectancy of any person is not an exact science. Despite the meticulous efforts that go into reviewing medical records, analyzing them, and translating the findings into a number representing how long a person has left to live, life expectancy is still only an estimate.
A chronically ill person could surprise everyone and live for 5 years more than predicted. He or she could be killed in a car accident and die sooner than predicted. A person with a bad heart could qualify for a life settlement and then, two years later, get a heart transplant and live for twenty more years. You just never know for sure how long someone will live.
When a person lives longer than they are supposed to live, that will lower the rate of return on a life settlement investment. Principal and interest are not returned to the investor until the insured dies and the death benefit is paid.
Death benefits held up in court
Although life settlements are carefully drawn up to prevent any disputes over the full payment of the death benefit, there is always the risk of litigation when it comes time for an insurance company to pay out the death benefit. Payment can be delayed. Legal costs to obtain the full death benefit can reduce the rate of return on this type of investment.
Higher premiums
One of the calculations that goes into the valuation of a policy is the amount of the number and dollar amount of the premiums the new owner will have to pay to keep the policy in force. In a non-guaranteed universal life policy, the life insurance company reserves the right to increase the premium up to the maximum amount shown in the policy. In practice, cost-of-insurance risks are very small.
Coping with the risk factors of life settlement investments
Performance of your investment can be affected by all of the above risk factors and many more. To help guard against those risks an investor should look for:
- An experienced manager with a history of delivering a solid ROI.
- Low expenses – High expenses can eat-away at your ROI.
- A portfolio of different types of policies issued by different insurance companies.
- A portfolio of policies diversified by face value and life expectancy.
- Periodic reports that show the fund’s performance and outlook.
- Expected returns based on reasonable assumptions and not on a best-case scenario. Be wary of someone who promises 100 percent returns in just two
years.
What are Life Insurance Settlements?
Your Old Life Insurance Policy May Hold Hidden Value as a Life Settlement
Most people, especially seniors assume that if they own a life insurance policy that they no longer need or want they have but two choices concerning the disposition of the policy.
- They can cash it in for the value of the policy’s cash surrender value, or
- They can let is lapse
These folks do not know about a third option, known as the Life Settlement option. Because the public is so poorly educated as to the benefits of the Life Settlement option, seniors are leaving loads of cash on the table when resolving what to do with unwanted or unneeded insurance policies.
What Is a Life Insurance Settlement?
Life insurance settlements or life settlements is a way for a person who owns a life insurance policy to monetize the policy for his or her use before they die. The insured sells the insurance policy to a life settlements company. The life settlement companies pay the insured more than the cash value of the insurance policy but less than the face value. When you sell your life insurance policy for cash, the seller gets immediate liquidity from an asset that was non-performing. The amount of money received is greater than if the insured cashes in the policy to the insurance company. Since the life insurance settlement option is not well known nor publicized, seniors mistakenly cash out policies leaving money they could have with a life insurance settlement behind.
In order to enter into life insurance settlements the seller must be over the age of 65.
Once the transaction is complete, the insured has nothing further to do with the insurance policy. The buyer makes the premium payments, and when the insured dies collects the death benefit.
What Determines the Life Settlement Value to the Seller?
Determination of the value of the policy to the seller is simply the highest price a buyer will pay for the policy. The primary evaluation tool used by the buyer is the Medical Evaluation (ME). The medical evaluation is a careful look at the medical records of the insured going back three to five years. A medical person reviews all medical records including hospital records, doctor’s office notes, lab results, and results of other diagnostic exams.
Based on this information, the life settlement company can make an educated guess as to how long the wait is to collect on the policy. This information determines how much more they will need to invest in it by paying premiums. If a medical evaluation determines that the seller has a year to live, he will receive a better payout than someone will with a similar policy that has an ME that estimates his remaining time to be three years to live.
In any event, the seller’s net gain is the face value of the insurance policy less the amount of the purchase price and the premium expense until the
policy pays out to the buyer.
“You must get your life insurance policy valued before you just throw it away. Seniors literally throw away billions of dollars a year.. without ever knowing.”
Comparing a Life Insurance Loan to a Viatical Settlement
If you can no longer afford the premium, don’t let the policy lapse. You must get your life insurance policy valued before you just throw it away. Seniors literally throw away Billions of dollars a year.. without ever knowing. Instead, explore your options before you make a decision you may regret. Comparing a Life Insurance Loan to a Viatical Settlement will help you make the smart decision for you and your family.
Life Insurance Loans
When you own a life insurance policy, you can borrow against the cash surrender value and use the money any way you see fit. In general, the longer you own the life insurance policy, the larger amount of money you will be able to borrow. A loan or life insurance advance is a good way for some individuals to get the money they need to pay for medical care or use in other ways while they are still alive.
You can elect to repay the life insurance loan and the accrued interest, or, upon your demise, the balance of the loan plus interest will be deducted from the death benefit. Your beneficiary will receive any remaining balance. If you choose to take a life insurance advance and not pay it back during your lifetime, you should make sure you have made alternate plans for your funeral expenses.
Viatical Settlements
In most states in the United States, laws are in place that allow terminally ill individuals to sell their life insurance policy to a third party viatical settlement company. The National Association of Insurance Commissioners 2009 Viatical Settlements Model Act serves as a guideline for the individual legislation and laws in each state that govern viatical settlements.
An individual with a life expectancy of two years or left can entertain offers from one or more viatical settlement companies and usually receive a greater cash settlement than if he or she took out a life insurance advance. In return for a cash payment, the settlement company continues to make the premium payments and becomes the beneficiary of the policy upon the death of the insured.
What is your best choice?
When comparing a life insurance loan to a viatical settlement, there are many similarities and a few differences. You do not incur any federal tax liability with either option and both methods provide the insured and his or her family with funds that can be used to help provide care.
When you opt for a loan, you can always pay it back. You can also choose to borrow only a portion of the surrender value. You are in control of the amount of how much money will be left to pay out to your beneficiary. With the settlement, you may receive a greater amount of cash, but you no longer own the policy. Once the deal is complete, you can not change your mind.
Why the life settlement industry may be your best source for cash?
Thanks in large part to the tremendous advances in medicine, people are living a lot longer today than they did back 50 or 100 years ago. According to the National Center for Health Statistics, a man born in 1930 had a life expectancy of 58.1 years and a woman born in 1930 could expect to live for 61.6 years. Men born in 1950 could be expected to live until age 65.6 and women to 71.1. In 2010, the expected life span of a man born in that year stood at 76.2 and, for a woman, at 81.1.
When you were younger and purchased a life insurance policy, you did so for a specific reason. Now that you are older, your circumstance are almost certainly different. Today, you may decide that you no longer have the need to maintain your life insurance coverage. It might be to your benefit to turn your policy into a lump sum of cash. Finding a provider in the life settlement industry can be your best option when you make the decision to relinquish ownership of your life insurance policy.
Deciding on Selling Your Life Insurance Policy for Cash
If you decide to relinquish ownership of your policy, there are several different approaches you might take. The least attractive of your options is to simply stop paying your premiums and let your policy lapse. When you do that, you may be giving up any value that has built up after years of paying your premiums. A second alternative is to take the cash surrender value of your policy. While better than letting your policy lapse, this option may not return much of the real value that is in your life insurance policy. That leads the third, and quite likely, the best option – a life settlement. You may even be able to sell your expiring term insurance for cash.
The life settlement industry is a relatively new industry that developed as a way of helping millions of people obtain more money from their life insurance policies than they could get by going directly to their insurance companies. When you qualify for a life settlement, you generally get well above the surrender value and somewhere less than the face value of your policy.
Life Settlement Industry History
Back in the early 1980’s, when the AIDS epidemic was taking many lives, patients were able to receive accelerated death benefits from their life insurance provider. Viatical settlements became available to policy owners who were terminally ill and had a life expectancy of less than 24 months. As medical knowledge and treatment of AIDS patients improved, so too did the life expectancy of these patients. While many of these patients still needed to access money from their insurance, they were not categorized as being terminal and could not qualify for a viatical settlement. Out of this need, the life settlement industry began in the secondary market for insurance.
It always is a smart idea to review your insurance needs as your life circumstances change over time. Getting a life insurance settlement does require you to meet certain benchmarks, but many people do qualify. In order to see if you qualify and can take advantage of a more generous offer to buy your life insurance policy, you should have your policy valued. If you do qualify, you are under no obligation to accept a life settlement offer and are free to proceed as you wish.
What Questions Should You Ask Before You Hire a Life Settlement Broker?
If you decide to use the services of a life settlement broker rather than going directly to a life settlement provider, you need to find one that can help get you the most money from your policy. The best company to sell your life insurance policy to is the one who will help you get the most for your policy.
What does a life settlement broker do?
You might say that a life settlement broker works in the opposite way of an independent insurance agent. While an independent agent helps you buy a life insurance policy, a life settlement broker helps you sell a life insurance policy. Both work to get the best deal for their client. Unlike an independent agent, who presents your application for insurance to multiple insurance companies, a life settlement broker presents your existing life insurance policy to multiple life settlement providers in the secondary market for insurance.
Is your broker licensed?
While the National Association of Insurance Commissioners (NAIC) was instrumental in developing the model for the regulation of life settlements, individual states control the licensing of life settlement brokers who do business in those states. Proper licensing and oversight helps assure a transaction follows proper procedures and complies with HIPPA and other medical privacy laws.
Many states are just now starting to pay close attention to the life settlement industry. Some of those states have a very easy application to obtain a life settlement broker’s license. Others, like Florida, Texas and Ohio, have very stringent licensing requirements. As a consumer, you have the right to ask to see a broker’s credentials. If a broker is unwilling or unable to show you that he or she is licensed in your state, that is a good reason to look for another broker.
Will your broker be transparent throughout the transaction?
A good life settlement broker will take plenty of time to educate you about the process of selling your policy in the secondary market for insurance. If you are confused or have unanswered questions, you should always be able to call your broker and get answers. Your broker should let you know the names of all of the interested buyers and also be willing to show you all written offers.
Watch out for a serious conflict of interest?
Just like many credit card issuers also own credit collection agencies, it is not unusual for a life settlement broker to have a close association with a specific life settlement provider. If your broker works in a separate office or division owned by the same company that owns the life settlement provider, that is a definite conflict of interest and may influence the amount of competitive offers you receive.
How is the fee calculated?
Your broker is paid on commission, but how the commission is calculated can vary. The most common life settlement fees include:
- Payment based on a percentage of the face value of the policy
- Payment based on a percentage of the settlement brokered
- Payment based on the value created (amount over the surrender value of the policy)
Your contractual agreement should clearly spell out the percentage of your broker’s commission as well as the basis for calculating the commission. Each method used to calculate your broker’s fee can ultimately make a difference in how much money you actually receive.
What are Life Settlement Investment Funds?
Life Insurance Investment Funds
Life settlement investment funds consist of a number of life insurance policies that have been purchased from life insurance policy owners. By pooling together a number of settled policies, the fund attempts to earn a risk-adjusted return for the investors in the fund. Each policy within the fund may generate a different rate of return, but the fund’s performance is measured by the collective returns of all policies within the fund.
In essence, a fund of life settlements provides diversity and reduces the risk of ownership compared to owning a single life settlement. While one investment within the fund might under perform expectations, another might do better than expected.
Unlike Annuities and Structured Settlements
Unlike an annuity, where an investor is guaranteed a specific rate of return, there are no guarantees on whether or not investing in a pool of life settlements will generate a specific return on investment. While you can limit risk and increase the probability of earning a solid return, it is possible for an investor to also lose some or all of their investment.
Life settlement funds can be an excellent way to diversify a portfolio of investments. There is a very low correlation with the returns that you may receive by investing in other asset classes. How the stock market performs may affect the price of gold, but has no effect on the performance of a life settlement fund.
Unlike a Fidelity growth fund, Vanguard Index fund, or any other mutual fund that is a common investment option for individuals, institutional investors are the prime buyers of life settlement investment funds. These funds are sold in the secondary market for insurance. Large institutions use these alternative investments to try to boost the performance of their portfolios and also to reduce overall investment risk.
A life settlement fund is only as good as the life settlements contained within the fund. It is up to the fund manager to accumulate the best possible portfolio of settled life insurance policies to reach the objective of the fund. There is always a trade-off between risk and reward in any type of investment and life settlements are no different.
If the fund pays too high a price to purchase life settlements or if the insured, who sold the policy, lives well beyond expectations, that can negatively affect the total return an investor would see on the life settlement fund. Therefore, one of the key components to running a successful fund is to make sure each life settlement that is purchased for the fund is properly valued.
A fund that contains policies where the average life expectancy of each insured is 3 years can provide a more certain rate of return (usually a lower percentage) than one that consists of policies where the average life expectancy for the insured is 7 years. It is also true that the potential rate of return on a fund with policies that have a longer life expectancy will be higher and carry a greater investment risk.
Life settlement investment funds may often outperform the stock market or other types of investments, but investors should be aware of the risks associated with such funds. Investing in this type of alternate asset class requires a great deal of due diligence. Perhaps that is the reason why this investment is more suitable for someone like Warren Buffet (Berkshire Hathaway) rather than Joe from Ohio?
Can I get an Advance on My Life Insurance Policy?
Did you know that if you own a life insurance policy, you may be sitting on a bundle of cash? You may be able to get an advance on life insurance that you have owned for years and use that money to provide for your current health care needs or use in some other way to make your life more comfortable. Life insurance is an asset just like your home or your car. It has value. As a smart consumer, you must get your life insurance policy valued before you just throw it away. Seniors literally throw away Billions of dollars a year.. without ever knowing.
Using your Accelerated Death Benefit
If your life insurance policy has an accelerated death benefit you may be eligible to take out a tax-free life insurance loan. The intention of this type of provision in a life insurance policy is to provide a benefit to an individual who has been diagnosed with a terminal illness and has a life expectancy of two years or less. In such an instance, a life insurance policy advance or loan against the death benefit of the policy, can be used to provide money to help the individual while he or she is still alive. Upon the death of the insured, the loan is paid off out of the proceeds of the death benefit and any remaining amount is then paid to the beneficiary of the policy.
Using a Life Insurance Advance
In the secondary market for life insurance, you may also be eligible for another type of advance on life insurance policies that you own. If your policy does not contain an accelerated death benefit rider you may qualify under a life insurance advance. Like an accelerated death benefit loan, you can borrow an amount up to $500,000, based on the amount of your death benefit of your life insurance policy. The life insurance loan is repaid, upon your demise, out of the death benefit and any remaining funds are distributed to the beneficiary.
In many ways, this type of life insurance policy advance is better than the much more restrictive accelerated death benefit loan. You do not have to meet the rigid requirements of having a terminal illness that gives you a life expectancy of two years or less. You also have the freedom to spend the money any way you see fit. Many people need the money for current assisted living expenses and this is an excellent way to meet that need.
Once you know how much the current value of your life insurance policy is, you can make an informed decision on whether or not you should apply for a life insurance loan. Although you may not have many years left, you should do what you can to enjoy the time you have remaining. Why not use the value in your life insurance policy to get the money you need?
Why is there a secondary market for life insurance?
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