Life Settlements

A life settlement is a financial transaction in which a senior citizen possessing an unneeded or unwanted life insurance policy sells the policy to a third party, as opposed to surrendering it back to the life insurance company. The seller receives immediate cash for the policy from the purchaser. The entity purchasing their policy becomes the new beneficiary of the policy at maturation and is responsible for all premium payments from the time of the purchase until the seller passes away.

Generally speaking, many policy owners who are the sellers in life 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 growth and 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 industry.

A recent overview of the life 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 settlement. Many are beginning to speculate that offering life settlements should fall under the fiduciary duty of a financial advisor.

Life 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.

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