March 27, 2022
Have you ever thought that your life insurance policy is no longer needed or too expensive to maintain? If so, you are not alone. Did you know that you have the option to SELL your policy for the real market value, rather than simply lapsing the policy or surrendering the policy back to the insurance company?
The sale option is called a life settlement transaction and is being discovered by more and more policyholders every year. The life settlement market – where people who own a life insurance policy make the financial decision to sell their policy in the secondary market to a third-party – has been growing steadily for the last decade. The right to sell your life insurance policy goes back to a ruling by the U.S. Supreme Court in 1911, Grigsby v. Russell.
What is a Life Settlement?
A life settlement is the sale of a life insurance policy to another person or entity that does not have a familial or business relationship with you. Sometimes, this could also be referred to as a “transfer for value.” When selling your insurance policy in a life settlement or viatical settlement, you receive an amount greater than the cash surrender value (if there is any) of your life insurance policy. Life settlement companies work with you to help you understand the entire process and determine whether your life insurance policy qualifies for a life settlement or viatical settlement.
After a policyholder sells a life insurance policy in a life settlement transaction, the policyholder is no longer responsible for life insurance premium payments. In addition, the policy’s beneficiaries will no longer receive the death benefit when the policy payout is made. The seller can use the cash payment received from the life settlement transaction however they see fit, whether that is to support their retirement lifestyle, pay off debts and bills, or buy another financial planning product.
How Big is the Life Settlement Market?
According to state regulatory filings reviewed by The Deal, in 2020, 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.
What can we say after looking at the numbers?
- The Life Settlement market continued to grow, even while the country was experiencing tremendous challenges during the Covid-19 pandemic.
- Consumer awareness of Life Settlements as an alternative option to policy lapse or cash surrender continues to grow as the life settlement industry pays out nearly $1 billion in cash to American senior policyholders.
- The average amount paid out to policy sellers was 21% of the policy death benefit (face value), an increase from the prior year.
- Investor demand in the life settlement asset class is increasing. According to Conning & Co., the total face value of life insurance policies owned but life settlement investors is in excess of $20 billion.
- The current size of the life settlement market is less than 10% of the estimated addressable market.
These figures are all regarding the secondary market – the initial sale from the policyowner to the life settlement company. There also exists a “tertiary market” for the resale of life settlements.
How Does the Life Settlement Market Work?
The life settlement and viatical settlement markets are regulated in most states (43 of 50 states) by the state insurance or financial services department. In all of the regulated states, a life settlement provider is the regulated entity that purchases the life insurance policy. The regulations are generally based upon model regulations developed by the National Association of Insurance Commissioners (NAIC) model act.
Life settlement brokers are also regulated and act as an intermediary between you (the policy seller) and the life settlement provider. Life settlement brokers charge a fee for their services. You can decide to work with a life settlement broker or directly with a life settlement provider. The Life Insurance Settlement Association (LISA) is the leading trade association for the life settlement industry. It is wise to check and see if your life settlement provider is a member.
When the policy sale is complete, you will direct the life insurance company to change the ownership and beneficiary of your policy to the life settlement provider or life settlement company. After the life settlement, you will no longer be responsible for paying any insurance premiums going forward – the life settlement company will pay all future premiums.
Who buys your life insurance policy? The vast majority of policy purchasers are large institutional investors who have dedicated life settlement funds. Make sure you ask your life settlement provider or life settlement broker if the life settlement company purchasing your policy is an institutional investor.
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. 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 Much is My Policy Worth?
The life settlement company will take into account your life expectancy, policy death benefit, and premiums to determine your life insurance policy’s valuation. Your payout from the policy sale will result from the underwriting process – a review of your medical records and life insurance policy. While the average payout is between 15% and 20% of the policy death benefit, the range is quite substantial from 5% to 55%, depending on your health. The worse your health, the higher the payout is likely to be. If you have a chronic or terminal illness (a viatical settlement), you can expect to be at the higher end of the payout range.
For a more in-depth review of how a life settlement is valued, you can refer to this blog post. In addition, you can visit our life settlement calculator to get an instant, no obligation estimate of your policy’s valuation.
Life Settlements and Viatical Settlements are Regulated Transactions
Life and Viatical Settlements are regulated transactions, overseen by state regulators. The regulatory rules are state-specific insurance laws with licensing requirements governing the settlement business for life settlement companies – both life settlement providers and life settlement brokers. This means that the same regulators that oversee the life settlement industry are the same ones overseeing the larger insurance industry.
What is the Role of a Life Settlement Provider?
The life settlement provider, which is subject to the state level regulations and approvals discussed above, is the company that enters into the life settlement sales contract with the policyholder. While a broker does not need to be involved in a life settlement transaction, a life/viatical settlement provider must be involved in any sales process in a regulated state.
The life settlement provider will produce the sales documentation package (with documents that have been approved by state regulators) and oversee the entire sales process. The life settlement provider is responsible for the escrow account funding of the sales proceeds and ensuring that funds are released to the policyholder on a timely basis. In addition, the provider will work with the life insurance company to ensure that the policy ownership is transferred to the life settlement company after the closing has been completed.
Who Invests in Life Settlements?
The life settlement market is attractive to large institutional investors based on the fact that a life settlement is uncorrelated to other financial markets. That means that investor’s return does not fluctuate with the performance of stocks, bonds, real estate, etc. or the general economic conditions (inflation, interest rates, growth trends, etc.). The performance of a life settlement fund is based upon the actuarial math and mortality results.
As a result, an investment in life settlements is considered a good diversification option for an investment portfolio. Institutional investors involved in the life settlement market include dedicated life settlement funds, banks, asset management firms, private equity funds, and hedge funds.
The exciting momentum in the life settlement market has continued, with increased activity and growth. More and more seniors are learning that selling their life insurance policy is an important part of their financial planning and wealth management strategy. Selling a life insurance policy can provide the liquidity you need to maintain your retirement lifestyle. The insurance industry does not want you to learn about this valuable planning tool.
At LCX Life, we work with you to understand the market value of your life insurance policy and, should you decide to do so, help you sell the policy for that market value. If you, family, friends or associates have a life insurance policy that is no longer needed or is too expensive to maintain, the experts at LCX Life will help you through the entire life settlement process. The sale of a policy will not only eliminate the financial burden of ongoing premium payments, but also result in an immediate, upfront cash payment that can be used to support your current financial plans.
All types of life insurance policies are eligible to be sold. Life settlements work best for people aged 70 and older, but those with significant health impairments may qualify at younger ages. If you would like to discuss the possibilities of a life settlement, please complete the information below, email us at email@example.com, or call us at 888-388-0988, and we will be in touch with you to see how we can help you.