If you are like many life insurance policyholders today who own a permanent policy, you have probably noticed that your insurance policy is hardly earning anything right now. The main reason for this situation is the low-interest-rate environment, and while rates may trickle up, they are still at historically low levels.
With the low earnings on your life insurance policy and serious inflation, everyone’s budget is being stretched. For these reasons, you may be interested in selling your life insurance policy to relieve your expenses and put some much needed extra cash in your pocket. However, you may have trepidation about selling your life insurance policy to someone you know.
Selling your life insurance policy to an unrelated third-party is known as a life settlement transaction or simply a life or viatical settlement. When you sell your policy in a life settlement, you receive a lump-sum cash payment for your policy at the time of sale, and you are no longer responsible for paying any insurance premiums. Also, your family members or beneficiaries will no longer receive a payment when you pass.
The life settlement industry is a highly regulated business, with state insurance regulators responsible for the licensing and oversight of life settlement providers and life settlement brokers. With over $20 trillion in life insurance outstanding and more than $3 trillion in new issuance and an almost equal amount of policy terminations each year, the life settlement market has enormous growth potential.
How long have life settlements been around?
In 1911, the Supreme Court unanimously agreed in the case of Grigsby v. Russell that life insurance policies were tangible assets that could be bought and sold like any other personal property. With this case ruling, the secondary market for life insurance, also known as the life settlement or viatical settlement market, was born.
Since the early days of the life settlement industry, much has changed. Starting with the National Association of Insurance Commissioners (NAIC) developing and publishing a model life and viatical settlement act in July 2009, most states (43 of 50) now regulate life settlements.
The life settlement market really started to flourish and the number of life settlement transactions really started to increase in the early 2000s. Many of those same life settlement companies and life settlement investors are still the most active companies in the life settlement market today.
How Big is the Life Settlement Market?
According to state regulatory filings reviewed by The Deal, in 2020 (the most recent year that data is available), 3,241 life insurance policies were sold in the viatical settlement and life settlement market (for an explanation, read the difference between a viatical settlement and life settlement blog article), an increase of more than 12.5% from 2,878 policies in 2019. The life settlement market asset class has been a growing financial market in recent years.
The total face value of the policies purchased in the secondary market in 2020 was more than $4.6 billion, an increase from $4.4 billion in 2019. In total, policy sellers received nearly $848 million from selling their policies into the life settlement market, many multiples of the policies’ cash surrender value, the amount the insurance company would give you for your policy. Policy owners win in life settlement transactions.
The largest markets for life settlements tend to be larger states – New York, California, and New Jersey – as well as sunbelt states that have large retirement communities – Florida and Texas. While the largest markets make for interesting facts, residents of any state are eligible for a life or viatical settlement.
Life Settlement Industry Reputation
The early days of the life settlement and viatical settlement industry, before there were any regulations or laws governing the market, saw numerous issues for life settlement investors with life settlement fraud and Ponzi schemes. While life insurance is not a security, this issue and other observations about the growing life settlement market was reviewed by securities regulators at the Securities and Exchange Commission (SEC) in a report completed by the SEC’s Life Settlements Task Force in 2010.
From the consumer selling a policy-perspective, life settlement fraud has not been an issue for many, many years. As a result of regulatory protections and policies and procedures of life settlement companies, only two consumer complaints regarding life settlements have been reported to U.S. insurance regulators since 2015.
Many things have changed since the early days of life and viatical settlements, particularly when it comes to the industry’s reputation and practices.
Life Settlements Fraud is Rare
The life settlement market grew more than 80% over the last five years (from 2017-2021) as more and more older Americans have learned about the life settlement option. But, is a life settlement safe? There is no question that the answer is a resounding “yes” and a couple of important points emphasize this conclusion:
- Regulation, Regulation, Regulation. Like all insurance products, life settlements are regulated at the state level by state laws and regulations. Currently, 43 of the 50 states regulate life settlement transactions (covering 90%+ of the U.S. population). This means that the company buying your policy has been vetted by the state insurance regulator and approved to conduct business in your state. We only work with life settlement companies that are properly licensed. You can always verify this with your state insurance department.
- Disclosure Requirements. All life settlement regulations require certain disclosures, including alternative options, the parties involved in the transaction, and the terms of the policy sale.
- Closing in Escrow. All policy sales are closed through an escrow account to ensure the safe closing of the transaction. Escrow Agents are typically FDIC-insured financial institutions. This ensures that your funds are safe and secured before you sell your policy.
- Form Filing and Approval Process. All of the closing documents have been filed with the state regulators and approved for use. This gives you comfort that the transaction terms are fair and have been properly vetted.
- Rescission Period. In all regulated states, the policy owner is afforded a period of time (typically 15 days) to unwind the policy sale if they decide they changed their mind about the policy sale.
For all the reasons listed above, you can be confident that life settlements are safe and secure transactions.
Who Invests in Life Settlements?
Life settlement investments are considered a good way to diversify an investment portfolio. Life settlements are considered a “non-correlated” asset, meaning that the investment return is not related to typical market forces and economic conditions – interest rates, stock market performance, unemployment rates, etc. – have no impact. Life settlement investments performance is based upon good underwriting and life expectancy evaluations.
Life settlement investors purchase large numbers of policies to allow the law of large numbers and statistics to play out with minimal risk. Selling your policy to a large fund investor also gives you the comfort of knowing that your policy is part of a large, diversified portfolio managed by professional investors.
What is an Insurable Interest?
Conceptually speaking, an insurable interest can be defined as the amount of financial hardship that someone will face upon your death. Insurable interest means an individual receives a financial or other type of benefit from the continued existence of the person insured. Insurable interest is always required in the insurance industry for a life insurance policy. That means, the policy owner must have an insurable interest in the person the policy is insuring (also referred to as the “insured”).
In other words, if the person insured were to pass away, the surviving person would experience a financial loss or other hardship. Insurable interest can happen in a familiar or business relationship. There can be an insurable interest requirement by any members of the insured’s family, including stepchildren, stepparents, biological relatives and others.
Insurable interest in a business relationship can be on a key employee without which it could not make a profit or between business partners. There are a variety of situations where one party can have an insurable interest on another party, and a variety of reasons why this type of interest can exist.
Life Settlements and Insurable Interest
With life insurance, insurable interest is always required at the time the policy is issued. Without insurable interest, the policy issuance is likely insurance fraud. After the policy has been issued and is in place, there is no ongoing test for insurable interest. As a result, a life settlement transaction does not require an insurable interest between the seller and buyer of the policy.
Who Qualifies for a Life Settlement or Viatical Settlement?
For a viatical settlement, the insured has no minimum age requirement, just a chronic or terminal illness (generally defined as a life expectancy of two years or less). For a life settlement, the insured should be aged 65 or older, although the majority of life settlement companies focus on insureds aged 75 and older. The underwriting helps determine the age eligibility – the more serious the health issues of the insured, the lower the age that will qualify.
Universal life insurance, whole life insurance, variable life, indexed life, and term life insurance – essentially all types of life insurance products – are eligible for a life settlement. In addition, group life insurance policies also qualify for a life insurance settlement. The life insurance policy being sold must have a face value (also known as net death benefit) of at least $50,000.
Your policy should be at least two years past its issue date, unless your policy was issued as a result of a term conversion. Universal life policies or term policies that convert into universal life insurance are the most common policies sold into the life settlement market.
How Does a Life Settlement Transaction Work?
If you meet the eligibility criteria for a life settlement, here are the steps that you should follow to ensure that you avoid any mishaps:
- Contact a life settlement company. Life settlement providers specialize in buying life insurance policies. Refer to our list of the best life settlement companies.
- Provide a copy of your information. The life settlement company will ask the you for a copy of the policy along with all pertinent medical records and any other relevant personal information. Alternatively, you can sign provided release forms that allows the life settlement company to collect information about you and your policy.
- Wait for the company to determine the market value of your policy. The life settlement company underwriters will use this information to calculate the current market value of your policy. The underwriting department will use your medical records to determine a life expectancy and use the policy’s premiums and death benefit in order to determine the value of the policy.
- Evaluate their offer. You will next receive an offer to buy your life insurance policy. This payout will generally be two to three times the amount of the cash surrender value in your policy but less than the face value.
- Accept the offer or explore other options. If you accept the cash payout price offered, you will sign the life settlement contract assigning ownership of your policy over to the life settlement company. You will also need to file paperwork with the insurance company to complete the sales process.
- Collect a lump sum cash payment. The life settlement company will pay you the life settlement proceeds with a lump-sum cash payment. You can use this money for anything you want or need.
- The life settlement company will take ownership of the policy. You will no longer be responsible for any future premium payments, but your family members or beneficiaries will no longer collect the death benefit when you pass.
What are the Tax Implications of a Life Settlement?
Refer to our blog article regarding the tax implications of a life settlement for further detail about preparing for the sale of your life insurance policy. If you are entering a viatical settlement transaction, you can read about the tax implications of a viatical settlement as well.
Who is LISA?
LISA, the Life Insurance Settlement Association, is the largest trade association representing the top companies in the life settlement market. Based in Washington, DC, LISA requires its members to adhere to the highest standards in the life settlement industry and promotes best practices for the industry and its members. Any type of company can join LISA – service providers, life and viatical settlement providers, life and viatical settlement brokers, life expectancy underwriters, banks, attorneys, etc.
Get a free valuation of your life insurance policy
Life settlements provide a great retirement and financial planning tool. If your life insurance policy no longer meets your needs or you cannot afford the premium payments, a life settlement may be a great option for you. If you’re interested in receiving a quick and easy estimate on the potential value of your policy, get an ‘instant’ no-obligations quote directly from our online calculator page!
Remember: Never abandon a life insurance policy without looking at the life settlement option first!