Life Settlements are a Force for Good!
In free market societies, such as the United States, any time that consumers are offered more options, it is good for consumers.
The secondary market for life insurance policies is exactly that: it is one additional option for policyholders to pursue when they realize that the policy they currently hold is no longer wanted or needed.
Many sellers of policies are high net worth individuals that are surrounded by qualified advisors such as lawyers, CPAs, or financial planners that assist them during the sale of their policy. They are generally sophisticated people that are well qualified to determine whether it is a wise business decision to sell their policy. Many of the policies being offered for Life Settlement are in the vicinity of $2 - $5 million in face value and can be as much as $20 million. Premiums are typically 3-5% of the face value of the policy or higher. Therefore, it is easy to see why an individual would want to stop paying the premiums if the personal or business need has gone away. Premiums may cost the insured tens up too hundreds of thousands of dollars per year.
Many of the policies purchased are "special purpose" policies such as estate planning policies, key man policies, etc. Once that purpose goes away (such as the estate becoming more liquid, key man is retiring, etc.), the policies frequently lapse or are cashed in for pennies on the dollar from the insurance company. In fact, according to a December 2006 article in the New York Times, insurance companies in 2005 reduced their financial exposure by $1.1 trillion when 19.8 million policy holders stopped paying their premiums.
By having the additional option to sell their policy to a Life Settlement firm, the policyholder is gaining full market value for his policy and can turn a death benefit into a living benefit. The bidding for policies is competitive, so sellers typically have more than one bid and have the chance to evaluate competing offers, and then accept the best offer they have received.
In light of the massive dislocations our capital markets have recently experienced, many seniors have a great need for the liquidity that can be provided through the sale of their life insurance policy. Seniors are turning 65 at a rate of ten thousand a day and will for the next 18 years. Increasingly, Life Settlements are purchased from sellers, under recommendation by their financial advisors, that may need the liquidity in order to maintain their standard of living, with their estates having suffered tremendous financial loss. For some, this is the asset that is easiest to part with, and provides a windfall of cash that was entirely unanticipated.
Finally, Life Settlement policies are not aggressively solicited in an attempt to persuade policyholders to sell. Rather, brokers nationwide present policies from policyholders that have already decided they want to sell. Again, once the policyholder has decided they no longer need the policy, Life Settlements provide an additional option for the seller.
Typically, the heirs and beneficiaries are part of the transaction, and are aware that the policy is being sold. Two right of rescission periods are part and parcel of every transaction so that by the time the transaction is funded, every opportunity has been given to the seller to back out of the transaction.
I would be happy to answer any questions you may have about this or any other life settlement topic. I can be reached at 888-849-0887 or llagrotte@lsa-llc.com.
