Life insurance settlement

A life insurance settlement is a transfer in which a citizen transfer (sells) an unneeded life insurance policy to a third party, instead of returning it back to the life insurance company. Person receives cash for the policy. The company purchasing their policy becomes the new owner of it and is responsible for all payments from the time of the purchase until the seller passes away.

Many policy owners who are the sellers in life insurance settlement transactions are unfamiliar with this option until a financial professional mentions the option to them. This particular type of transaction has not yet become a mainstream financial product like stock and bond transactions, though in the past few years the positive industry
( Life insurance settlement ) growth and got attention from high-profile proponents such as Warren Buffett, former U.S. Representative Bill Gradison, and The Wall Street Journal has created much interest in the
life insurance settlement industry.

A recent overview of the life insurance settlements market can be found in the 2005 Industry Outlook compiled by major industry firm Maple Life Financial. A survey found on page 4 of this publication found that almost half of all responding advisors had senior clients who had surrendered a life insurance policy for the cash surrender value (in the case of a term life policy, the surrender value is $0) when many of these clients could potentially have qualified for a life insurance settlement. Many are beginning to speculate that offering life insurance settlements should fall under the fiduciary duty of a financial advisor.

Life insurance settlement. Brokers

The decision to work with a settlement broker is up to the client, since financial advisors can submit the client's case to the life settlement provider directly. However, in an industry where market value for life insurance policies is not common knowledge, brokers typically do the best job of obtaining fair market value for a senior citizens policy. By submitting life insurance settlement cases to multiple providers, they are able to obtain a greater number of bids overall, and help facilitate negotiations between high bidders.

Life insurance Settlement - History

The life settlement industry grew out of the viatical settlement industry in the 1990's. Viatical settlements were similar to life settlement transactions, except they usually involved sellers with life expectancies of less than 2 years. Many of these people were terminally ill with the AIDS virus, and welcomed the extra cash from the sale of their policy. With the advent of drugs that kept AIDS victims alive for a longer period of time, many investors suffered and had to pay premiums for a much longer term than expected. Some scam artists marketed viatical settlements as an investment product, but never used the investors' money to purchase policies for a portfolio. It was clear that if the secondary market for life insurance was to survive, regulation was necessary.

The National Association of Insurance Commissioners (NAIC) took a crucial step when they released the Viatical Settlements Model Act in 2001, defining guidelines for avoiding fraud and ensuring sound business practices. Around this time, many of the life settlement providers that are prominent today began purchasing policies for their investment portfolio. These policies had different criteria than viatical settlement purchases, namely in terms of the client's life expectancy. While viatical settlements had previously attracted negative attention to the secondary life insurance market, major research firms began to take notice of the life settlement phenomenon and portray the industry in a positive light.