What is a Life Settlement?
In existence for almost two decades, Life Settlements are quickly becoming the top alternative investment in 2018. At one time, they were sought only by corporate and institutional investors. Now active life insurance policies may be purchased by a third-party investor for a greater price than their cash surrender value.
Life settlements started in the United States and have been in existence since the late 1990s. They are a low-risk form of investing with a possibility of a high return. It is unique from traditional investments. The investment style is unlike oil prices, financial or stock markets, and interest rates.
Supporting legislation has gained in strength. There are two main reasons the investment is growing in popularity. That is financial market instability and the significant population of Baby Boomers.
They are a low-risk form of investing with a possibility of a high return.
There is quite a difference between policy surrender values and fair market values. Policyholder options were quite limited until recently. The policyholder surrendered the in force life insurance policy to the insurance company. In return, the insurance company paid the cash surrender value less any fees and loan amount. Now there is an option to sell their policy on the secondary market. Investors pay more money than the insurance company.
Surrendered policies result in a small part of the actual premium paid. An example is:
Policy value: $2 million
In force: 5 years
Premium paid: $250,000
Surrender value: $75,000
The estimated value on open market is $400,000. That’s quite a difference.
Policies that lapse for nonpayment benefit the insurance company. They gathered premiums for some time and have no obligation to pay anything.
Why Sell a Life Insurance Policy?
The insured cannot afford the payments. Insurance policies are often opened when a person’s financial outlook is positive. The policy helps cover long-term debts in the event of death. A change in employment or increase in expenses reduces or ends the ability to pay premiums.
The insured may want to use the money for expenses or to cover a bucket list item before they pass from this world. There may be a grandchild to meet or a particular location they want to visit. Payment is made based on the following:
- Insured’s life expectancy.
- Face value of policy.
- Projected ongoing premium.
The result is a productive rather than non-productive asset.
The stock market has no effect on life settlements.
A policy may no longer be needed because there are no heirs. Life insurance policies help those left behind take care of expenses. Sometimes the insured outlives the person or persons meant to be helped. There is no need to continue paying high premiums for a policy that no longer matters.
Are Life Settlements a Reliable Stock Market Alternative?
Financial managers recommend that investors diversify assets. In other words, continue investing in the volatile stock market if you like. Add less-threatening investments like life settlements to your investment portfolio. The policy’s owner receives a lump sum cash payment. Policy ownership and beneficiary rights are transferred to the new investor(s) or owner. The new owner also takes responsibility for paying future premiums.
There are two types of transactions in the sale of life insurance policies.
Viaticals are alternative investments based on the laws of each state. It identifies a situation where the insured has a life expectancy of less than two years. A chronic, terminal, or catastrophic condition or illness is also involved.
Life Settlements involve insureds over 65 years of age who have a life expectancy of 20 years or less. There is no rule for a terminal or chronic condition or illness.
The steps required to complete either settlement are the same. Most investors don’t have the money available to buy over a policy. The good news is that individual investors put money into a pool. The investment company splits the investment cost among a number of investors. Investment benefits of the contract include:
- Qualifying for IRA and 401K plans or held in a taxable portfolio.
- Capital gains have a favorable tax rate.
- Policy pays face value upon insured’s death, divided among investors for that policy.
In summary, life settlements are long term investments that provide income upon on maturation of the policy. The stock market has no effect on life settlements. A small investment is powerful when combined with funds from hundreds of other individuals.
The insured usually has an expected lifespan of less than 7 years. Do not rely on life settlements as a source of income for everyday expenses. Instead, regard them as a way of securing a safe investment unaffected by risk in the stock market.