Selling a life insurance policy for cash to a third party can be a long process. However, the same four key players involved in the process offer a rare constant throughout each case. The insured, the provider (people who buy life insurance policies), the broker, and the life insurance company are each involved in the process.
Of the four parties involved, only one stands to lose money, the life insurance company.
In 2015, it was reported that $112 Billion in Universal Life and Whole Life insurance policies were lapsed by seniors over the age of 65.
Based on 2008 data compiled by publicly available sources, more than 250,000 universal and variable universal policies with a face value of approximately $57 billion were lapsed by seniors over age 65. When term and whole life policies are included, the number of policies exceeds 1.1 million with a face value of $112 billion. If the data were available for 2014, the amount would be even greater.
To better understand how/if all of the parties involved in a life settlement benefit, it’s important to understand how a life settlement works.
A life settlement is a transaction where a third party purchases a life insurance policy from a policy owner, who we’ll refer to as the “insured.” The insured is relieved of making any future premium payments; the new policy owner will assume this responsibility. The policy stays in force, and the death benefit will be paid to the new owner of the policy upon the death of the insured.
An insured is motivated to sell a life insurance policy when unable/unwilling to continue paying premiums and would like to access the cash value of the policy without letting the policy lapse. One of the main reasons this happens is the insured has become seriously ill and has lost the ability to maintain timely premium payments due to costly medical expenses, loss of income, or both.
After many years of paying premium payments to the insurance company, an insured does not want to see their policy lapse without value. With a permanent type of life insurance policy, or a term insurance policy converted into a permanent plan, there is a build-up of cash value because a portion of each premium payment accumulates inside of the policy. Depending upon the type of policy it is, this cash value grows because of interest it earns or because of positive investment returns.
It’s important to know that life insurance is a legal asset controlled by the policy owner, who has the legal right to keep it or sell it, just as they would with real estate or other assets they own. They have the right to sell the policy to a third party as part of a life settlement for cash consideration.
The insured benefits by having cash on hand to pay for medical expenses, long-term care, or other living expenses with which they need assistance. They gain the peace-of-mind that comes with the lessened financial pressure they face and the ability to meet their financial obligations. It is an economic benefit they have earned after years of paying premiums on their life insurance policy.
The third party that ultimately becomes the new policy owner through the purchase of the life insurance policy benefits in several ways.
Firstly, the provider benefits from knowing that they have provided financial assistance to someone who has monetary needs. They have the satisfaction of providing funds for someone to pay growing medical bills or helping someone receive the long-term care that they have come to need. This can be very fulfilling to the purchaser of the life insurance policy.
Secondly, the buyer of the policy has made a wise financial investment. They have purchased an asset for a fixed sum of money, and they are going to realize a fixed gain at some future point in time. The point in time they’re going to realize the gain is when the insured dies. They will have studied mortality tables and will be able to estimate the life expectancy of the insured and make a reasonable estimate of how long the insured will be alive. This allows them to calculate their rate of return.
A major contributor to the success of the life settlement transaction is the life settlement broker.
The broker is the main point of contact for the policy owner. The broker assumes all of the underwriting responsibilities, including ordering medical records, and preparing a case to go to market. This service alone offers the policyholder considerable value. As with any broker and seller relationship, monetary goals are always aligned, which ensures the best possible price for the policy. Life settlement brokers should also provide information that educates the insured about the life settlement industry and process.
In addition, the life settlement broker is available to answer a myriad of questions from the insured while providing full disclosure about the life settlement process and the impact on the insured.
Finally, the life settlement broker has a network of buy-ready investors which leads to a bidding war for the insured’s policy, typically resulting in higher offers and better results than simply selling a policy to a direct buyer like Coventry Direct.
Of all four parties involved in a life settlement transaction, the insurance company that issued the policy is the only party that does not financially benefit. Life insurance companies make money when a policy lapses. In fact, the majority of life insurance policies issued simply lapse, benefitting only the insurers.
So, in any life settlement transaction, life Insurance companies stand to lose money because they will now have to pay out a death benefit, which they might have avoided. They will ultimately have to meet their promised obligation at the death of the insured. For this reason, life insurance companies resist the sale of a life insurance policy at every turn throughout the process. This is another reason consumers are encouraged to hire a broker whose job it is to move the process along.
Finally, new laws have been passed that require insurance companies to make the life settlement option known and available to the insured/owner.
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