Life Settlements-The Good,The Bad, And The Ugly

First, the Ugly

Every market has those who try to “game” the system.  Many seniors have fallen prey to agents tempting them with an offer of free money.  The senior is induced to purchase life insurance without a legitimate need for such coverage.  The insured then waits two years so the policy becomes uncontestable, sells the policy, and shares the proceeds with the other parties to the transaction. This is called “stranger originated life insurance” (STOLI).
 
There are two major concerns that any individual should be aware of when thinking about such a transaction.  First, there is no insurable interest.  That is, the applicant has no legitimate purpose.  Secondly, many states are considering, or have made this type of transaction illegal. STOLI transactions corrupt the marketplace by changing the basis on which premiums are determined.
 
The Bad

Many people who have purchased life insurance for legitimate purposes may need money due to a terminal illness.  Individuals who are induced to sell policies in this situation enter into what are known as “viatical settlements”, selling their policy for a percentage of the face amount to obtain money for immediate living expenses.  These transactions became popular at a time when a diagnosis of AIDS meant a short life expectancy. Viatical settlements allowed the terminally ill to receive cash during their last days.
 
Today, the insurance industry has made such sales unnecessary for policies sold in the last few years.  Most policies include a no-cost rider which allows for a substantial portion of the face amount to be paid to the terminally ill in advance of death with sufficient documentation.  This eliminates the need for a viatical settlement, and gives the insured and beneficiary the full policy value.

The Good

There are many legitimate reasons to consider the sale of a life insurance policy that was purchased in good faith for protection against the insured’s death.  Term policies are purchased for protection for a limited time period.  Generally, these policies are written to protect family members who rely on the insured’s income, or in business situations to protect the company from loss of an owner. Once the original objective no longer exits due to a change in circumstance, a life settlement may be a good option.

Another reason to consider a life settlement would be affordability.  If the premium can no longer be paid due to a negative change in circumstances, the owner may benefit substantially by selling the policy through a life settlement transaction.  Today more the ever, this is unfortunately the situation many seniors find themselves in.

To be considered for a life settlement the term policy must be convertible into a universal life policy.  While some whole life or variable life policies are suitable for purchase, generally this is not the case.  If you own a term policy, simply check the contract to determine when and what your current policy is convertible into. If you are unsure, your agent or the insurance company will be able to help you determine if your policy is convertible.
 
There are many factors that affect the ability to sell a policy in a life settlement.  Generally, the insured must be over 65 and without a terminal illness.  Remember the insurance company makes a life settlement unnecessary in a terminal illness situation. An agent familiar with life settlements can assist you in determining if this type of transaction is right for you.

Next Steps

If you're considering a life settlement, speak with an agent who is well versed in this area.  They will help you select an experienced broker. There are many life settlement companies that will assist you in selling your policy, but like any transaction “let the buyer beware”.  There are several important considerations when choosing a life settlement broker.  You will want to deal with a company that has been in business for a relatively long time, long enough to generate a reputation.  You will want to see how your transaction is handled in the marketplace.  How many bids are requested?  How transparent is the transaction?  Can you see the various bids for your policy?  How are the funds allocated? 

While there are always questions that are specific to your situation, this article should help you to understand the general nature of the life settlement transaction.  A good agent will help you navigate this maze to produce the best outcome for you.