Life settlements are a financial planning tool available to policyholders who have impaired health but are not terminally ill. Since the life settlement industry emerged it has become a tool that many use to cash in on life insurance policies that are usually surrendered back to the life insurance company or just allowed to lapse.
The life settlement industry emerged back in the 1980’s when AIDS was prevalent in our society. Typically, AIDS paitents would sell their life insurance policies to life settlement firms so they could pay for expensive medical treatments. The normal settlement price fell somewhere between the surrender value and face falue of the policy. Now, since AIDS patients have a longer life span, other sources of life settlements are being targeted and large institutions are bringing in new sources of capital. This inflow of new capital is making the life settlement industry grow considerably.
The typical life settlement firm seeks policyholders that are at least 65 to 70 years old with life insurance policies carrying a face value of $250,000 or higher. In most cases, any type of life insurance policy qualifies as long as the policy is convertible. All that means is that your term policy allows you the right to change (convert) the policy to universal life or whole life policies without providing proof in insurability.
Here's an example. Let’s say that someone in their mid 60’s decides they no longer want their $1 million life insurance policy. They’re tired of paying the premiums or simply can no longer afford to pay, their beneficiaries are all dead, and their health is detiorating. A life settlement firm will buy this person’s policy for up to 2 to 3 times its surrender value. The life settlement company will then continue to pay the premiums and receive the $1 million death benefit after the insured dies.
There are scores of assumptions and statistics used to price life insurance policies. One of these statistics is the expected lapse rate. Life insurance companies price policies (in part) based on the expectancy that the policy will lapse. Life settlement companies make this part of the policy pricing a little more difficult because the life insurance company doesn’t know who or how many policyholders are going to sell their death benefit to a life settlement company. Necessary adjustments will need to be made to compensate for the increased number of policies still in effect upon the death of the insured. What eventually will happen is that life insurance companies will set more money aside in reserve to cover expected losses. As a result, life insurance rates could increase. Time will tell.
It seems that this secondary life insurance market is beneficial to consumers who’s financial protection needs have changed. With the life settlement market emergence, there are more options for policyholders to consider. This usually increases competition – ultimately good for the consumer.
Friday, May 26, 2006
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