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Learn To Invest in Life Settlements: The Pros and Cons

Learn To Invest in Life Settlements: The Pros and Cons

February 6, 2023 By Kurt Henn last modified on February 6, 2023 Leave a Comment

We think that the meaning of the word “investments” is limited to the stock market and that people are tired of this. Even in the world of broker-dealers, who often deal in “alternative” investments, many of these investments are actually securities within the mutual fund world, such as REITs (Real Estate Investment Trusts that are securities, not property) or mutual funds that invest in precious metals.

Life insurance is a completely different thing, based on math that uses statistics to predict future events (though it is not considered an “investment”). Many corporate and sophisticated investors have been finding life settlements to be a popular life-insurance based investment.

Life settlements are purchased by hedge funds, pension funds, multinational banks, and other major financial corporations. Even Warren Buffett invests in life settlements. The life settlement industry is predicted to grow significantly in the next few years. This investment management firm discovered that $200 billion in life insurance will be given up or will expire in 2027.

So what exactly are life settlements? This article will provide you with information on life settlement investments, their advantages and disadvantages, and who would be a good candidate for this type of investment.

Table of Contents

  • Can You Sell Your Life Insurance Policy?
  • Who Is Involved in Selling Life Insurance Policies?
  • Why Would Someone Want to Sell Their Life Insurance Policy?
  • How Does Selling a Life Insurance Policy Work?
  • How to Sell Your Life Insurance Policy: the Process
    • 1. Detailed health questionnaire.
    • 2. Authorization.
    • 3. Insurance Policy Review.
    • 4. Underwriting.
    • 5. Offer.
    • 6. Closing.
  • Tips for Selling Your Life Insurance
    • 1. Make sure the life settlement company is licensed.
    • 2. Speak with a financial advisor.
    • 3. There may be fees & commissions.
    • 4. You won’t have coverage.
    • 5. Be responsive.
    • 6. Speak with your family.
  • Do Life Settlements Belong in Your Portfolio?
    • What Are the Advantages of Life Settlements for Investors?
    • Are There Disadvantages to Investing in Life Settlements?
  • How Can I Invest in Life Settlements?
    • 1. Direct Purchases of Life Insurance policies.
    • 2. Direct Fractional Life Settlements.
    • 3. A Life Settlement Private Equity Fund.
  • If Life Settlements Are So Great, Why Haven’t I Heard of Them?
    • Further reading:

Can You Sell Your Life Insurance Policy?

Yes, you can sell your life insurance policy by obtaining a life settlement. To get a life settlement, you sell your life insurance policy to a third party for a cash payout that is more than the policy’s cash surrender value, but less than the total face value of the policy.

A viatical settlement follows a process that is very similar to a life settlement. A viatical settlement is like a life settlement, but the person selling the life insurance policy has a chronic or terminal illness.

The viatical settlement process is similar to a life settlement, but the tax implications and state regulations differ drastically.

Who Is Involved in Selling Life Insurance Policies?

When you are selling your life insurance policy, you can either go to the company that will purchase the policy, or you can use a life settlement broker.

A broker may take a commission of 20% or more from your settlement, which may be a good option depending on your circumstances. The value of your policy could have a significant impact on the amount of money you receive.

If you want to get the most money possible, it is best to go to a licensed provider.

Why Would Someone Want to Sell Their Life Insurance Policy?

There are many reasons that someone may no longer need or want their life insurance policy. Some common reasons include:

  • A spouse may have passed and other children/heirs are self-sufficient.
  • The insured may have divorced or have no heirs they wish to leave assets to.
  • Funds may be needed to pay for long-term care or healthcare costs.
  • Changes in estate or tax law may cause an individual to consider lapse or surrender of a policy.
  • The policy owner has fallen behind in payments, experienced a change in their personal finances, or wishes to halt remaining premium payments.
  • A desire for cash arises, whether to purchase a retirement home or fund a grandchild’s college tuition.

In other words, the policy owner would rather have a large sum of money to figure out what to do with, instead of keeping their insurance policy. Some people want to exchange their life insurance policy payout for a smaller amount of money that they can use while they are still alive.

How Does Selling a Life Insurance Policy Work?

If you’re thinking about selling your life insurance policy because it’s become too expensive or you don’t need it anymore, the first step is to find a buyer.

The most straightforward way to identify a life settlement buyer is to investigate the life settlement industry. When you sell your policy to a licensed life settlement provider, you will be working with experienced professionals who understand the specifics of life settlements well.

To get started with a life settlement company, you’ll first need to check that you meet the minimum qualifying factors, such as:

  • Own a policy with a death benefit of $100,000 or more – anything less than that typically doesn’t qualify unless there are significant health impairments.
  • According to the U.S. Government Accountability Office (GAO) life settlement market study, people who sold their life insurance policies were generally over age 60.
  • A decline in health from the time your policy was issued can help improve your chances to qualify, but it isn’t required.

While each individual case is different, there are some general guidelines that can be looked at. However, it is important to keep in mind that any single factor can be more important than any other. For example, being over the age of 65 could be more important than having a decline in health. To see if you satisfy the minimum requirements, you can get a free evaluation of your policy now.

The initial step is for your convenience and to protect your privacy. Before you submit any personal health documents, you should make sure you meet the minimum standards.

How to Sell Your Life Insurance Policy: the Process

Once you know if you qualify, the next steps usually will look something like this:

1. Detailed health questionnaire.

After meeting the basic requirements, you will fill out a health questionnaire that will give a more thorough look at your health.

2. Authorization.

The insurance company will need to be contacted by the life settlement provider on the policyowner’s behalf in order to access medical records for the insured.

3. Insurance Policy Review.

In order to get a policy, you need to have a contract as well as a premium illustration. If you don’t have copies of these documents available, you can get them from the insurance company. They will give you a better understanding of the details of your policy.

4. Underwriting.

The process of determining the value and approximate life expectancy of the insured by evaluating the policy and medical records.

5. Offer.

If the life settlement provider has all the information they need and would like to make an offer, they will present the specifics to you and explain the next steps. You can choose to receive the full cash value of your policy, or you can choose an option like Retained Death Benefit, where you would receive a smaller cash payment but keep some of the benefits of your policy without having to pay any more premiums.

6. Closing.

The closing process is when the policy and all the documentation is transferred to the new owner. The final payment for your home will be put on hold by the escrow company until the insurance company has confirm that the ownership of the home has been transferred. Your settlement payment will be released from escrow after it has been verified.

Tips for Selling Your Life Insurance

Use these tips to help you with life settlements.

1. Make sure the life settlement company is licensed.

This means that each state has its own regulations regarding life settlements. The state insurance department can tell you if the company you’re dealing with is licensed in your state.

2. Speak with a financial advisor.

Before selling your insurance policy, it is recommended that you speak with a financial advisor or tax specialist.

3. There may be fees & commissions.

If you contact a life settlement company like Coventry directly, you can avoid paying large fees and commissions.

4. You won’t have coverage.

If you are interested in maintaining coverage, you should look into a Retained Death Benefit.

5. Be responsive.

You will need to talk to the provider and your healthcare providers a lot, and you may also need to talk to your insurance company. The less responsive you are and the less information you can provide, the more difficult the process will be.

6. Speak with your family.

Your beneficiaries will need to be involved in the process, as they will probably need to sign a consent form when the transaction is completed.

Do Life Settlements Belong in Your Portfolio?

Do Life Settlements Belong In Your Investment Portfolio

What Are the Advantages of Life Settlements for Investors?

When we say that a good investment is one that generates double-digit interest rates with no loss of principle, we are thinking about life settlements. While previous investment results are not necessarily indicative of future returns, and there are always risks associated with investing, life settlement funds have generated consistent gains in the past, ranging from annualized returns of mid-single digits to low double digits.

Returns from investing in a cooperative are not affected by how well the stock market is doing, housing prices, interest rates, or politics. The policies offered by the company are typically backed by life insurance companies that have high ratings for stability.

An investment that benefits both parties involved is what is known as a “win-win.” Seniors that no longer want or need their permanent insurance policies can get some cash value from surrendering them, but if they are able to sell the policy for more, then they come out ahead. Seniors can get up to four times the cash value when they surrender their policy. This means that both investors and seniors who sell their life insurance policies reap the benefits.

Are There Disadvantages to Investing in Life Settlements?

The biggest downside to investing in penny stocks is that they’re not accessible to most investors. At this point in time, direct or direct fractional policies can only be sold to investors who have been accredited.

The types of investors that are accredited include individuals, banks, insurance companies, employee benefit plans, and trusts. To qualify, an individual must earn an annual income of $200,000 ($300,000 for joint income) or have a net worth of $1 million.

Investments in life settlements are not available in every state. At this time, you cannot buy a fractional life settlement in most states.

The investment must be funded for the entire duration. An additional potential issue is that funds will commonly be obstructed in a life settlement investment for numerous years, such as 7, 8, or even 10 years. Life settlements are not like mutual funds where people can buy and sell at will. Private equity funds have a set duration, and while it is possible to withdraw your investment early, it is not easy or beneficial to do so.

Life settlements must be selected and managed correctly. Investors who manage their own investments can often do well with something like peer-to-peer lending, but life settlements are a more complicated investment that requires expert help to select, manage, and oversee.

This means that there must be money available to pay for the policies, or they will be stopped. It’s important that the policies were bought and sold legally, because otherwise losses will be incurred.

How Can I Invest in Life Settlements?

There are three basic ways that Life Settlement investments are bought and sold:

1. Direct Purchases of Life Insurance policies.

This requires a lot of money, as well as the expertise to buy the right policies. For those who wish to invest more than one million dollars, this is an option. Although life settlements may be the most efficient option in terms of costs, they require expert analysis and are not a project that can be completed without professional help.

2. Direct Fractional Life Settlements.

With Direct Fractional life settlements, a policyholder can sell all or a portion of their life insurance policy to an investor group. The group then pools the policies and manages them as a whole. Each investor owns a portion of one or more policies.

3. A Life Settlement Private Equity Fund.

This option allows the investor to purchase a portion of a fund that contains hundreds of different policies. One advantage to this is diversification. If you only invest in one or two policies, you will not make as much money as you would if you invested in a fund.

If Life Settlements Are So Great, Why Haven’t I Heard of Them?

Most financial advisors aren’t aware of true alternative investments. If they work for a brokerage firm, they typically can only sell certain types of investments. Many advisors and brokers are not allowed to sell products that are not offered by their brokerage firm.

Although Warren Buffett and Bill Gates have invested a lot of money into life settlement funds, it may be a good idea to investigate them if you are a wealthy investor.

For us, we look at life settlement investing as something we do after we have achieved financial freedom.  Once we have enough cashflow that exceeds our expenses.  Focus is important, but life settlements are a viable option once we get to that stage.

Further reading:

11 proven ways to build wealth in your 30s11 proven ways to build wealth in your 30s What Investments Are Inflation ProofWhat Investments Are Inflation Proof? How To Start Investing Money For BeginnersHow To Start Investing Money For Beginners How Much Should You Contribute To Your 401kHow Much Should You Contribute To Your 401(k)?

Filed Under: Features, Personal Investing & Finance

About Kurt Henn

Follow @40Finance

Kurt runs things around here. He is a professional real estate investor, media buyer, faithful Red Sox Fan.

Pursuing financial freedom while being a family man.

You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.

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