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 an entirely 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 a popular life insurance-based investment.
Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements. 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 information on life settlement investments, their advantages and disadvantages, and who would be a good candidate for this type of investment.
Key takeaways:
- The meaning of investments is not limited to the stock market.
- Life insurance is an entirely different thing based on math that uses statistics to predict future events.
- Hedge funds, pension funds, multinational banks, and other major financial corporations purchase life settlements.
- You can sell your life insurance policy through a life settlement, and the process involves filling out a health questionnaire, authorizing the insurance company, reviewing your policy, underwriting, receiving an offer, and closing the deal.
- There are advantages and disadvantages to investing in life settlements, such as high returns, lack of correlation with the broader economy, limited accessibility, and long-term investment commitment.
- Life settlements can be bought and sold through direct purchases of life insurance policies, direct fractional life settlements, or a life settlement private equity fund.
- Many financial advisors are not aware of alternative investments such as life settlements, but they have gained popularity among wealthy investors.
Can You Sell Your Life Insurance Policy?
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 very similar process to a life settlement. A viatical payment 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 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.
Depending on your circumstances, a broker may take a commission of 20% or more from your settlement, which may be a good option. 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?
For many reasons, 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.
- Whether to purchase a retirement home or fund a grandchild’s college tuition, a desire for cash arises.
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 they can use while still alive.
How Does Selling a Life Insurance Policy Work?
If you’re considering selling your life insurance policy because it’s become too expensive or you don’t need it anymore, the first step is finding a buyer.
Investigating the life settlement industry is the most straightforward way to identify a life settlement buyer. When you sell your policy to a licensed life settlement provider, you will work 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 significant health impairments exist.
- 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 when your policy was issued can help improve your chances of qualifying, but it isn’t required.
While each case is different, some general guidelines can be looked at. However, it is essential to remember that any single factor can be more important than any other. For example, being over 65 could be more important than having a decline in health. You can get a free policy evaluation now to see if you satisfy the minimum requirements.
The initial step is for your convenience and to protect your privacy. Before submitting any personal health documents, you should ensure you meet the minimum standards.
How to Sell Your Life Insurance Policy: the Process
Once you know if you qualify, the following 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 you a more thorough look at your health.
2. Authorization.
The insurance company will need to be contacted by the life settlement provider on the policyholder’s behalf to access medical records for the insured.
3. Insurance Policy Review.
To get a policy, you need to have a contract and a premium illustration. You can get copies of these documents from the insurance company if you don’t have them. They will give you a better understanding of the details of your policy.
4. Underwriting.
The process of determining the insured’s value and approximate life expectancy 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 select an option like Retained Death Benefit, where you would receive a smaller cash payment but keep some of the benefits of your policy without paying any more premiums.
6. Closing.
The closing process is when the policy and all the documentation are 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 confirmed that the ownership of the house 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 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.
To maintain 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 speak to your insurance company. The less responsive you are and the less information you can provide, the more complex the process.
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?
What Are the Advantages of Life Settlements for Investors?
When we say that a good investment generates double-digit interest rates without loss of principle, we think about life settlements. While previous investment results are not necessarily indicative of future returns, and risks are always 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. Life insurance companies with high ratings for stability typically back the policies offered by the company.
An investment that benefits both parties is known as a “win-win.” Seniors who no longer want or need their permanent insurance policies can get some cash value from surrendering them, but if they can sell the policy for more, they come out ahead. Seniors can get up to four times the cash value when they surrender their policy. This means investors and seniors who sell their life insurance policies reap the benefits.
Investing in life settlements comes with a myriad of advantages. At its core, it offers a unique opportunity to invest in a niche market entirely detached from fluctuations in the stock market. With a life settlement, the investor purchases the rights to a life insurance policy from someone who no longer wants or needs it. The investor then receives the death benefit after the policyholder passes away.
One of the standout advantages of investing in life settlements is that the returns are not correlated with the broader economy. For instance, a life settlement policy investor will receive the same amount as an investor who purchases treasuries but with the bonus of completely detached performance. This investment offers a unique opportunity with the potential for significant returns.
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, direct or direct fractional policies can only be sold to investors who have been accredited.
The accredited investors 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. Currently, 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 ten years. Life settlements are unlike 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.
Life settlements must be selected and managed correctly. Investors who manage their investments can often do well with peer-to-peer lending. Still, life settlements are a more complicated investment that requires expert help to select, manage, and oversee.
This means that money must be available to pay for the policies, or they will be stopped. It’s essential that the guidelines were bought and sold legally because otherwise, losses will be incurred.
How Can I Invest in Life Settlements?
There are three primary ways that Life Settlement investments are bought and sold:
1. Direct Purchases of Life Insurance policies.
This requires a lot of money and the expertise to buy the right policies. This is an option for those who wish to invest more than one million dollars. Although life settlements may be the most efficient option regarding 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 piece 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 particular investments. Many advisors and brokers are not allowed to sell products 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 cash flow that exceeds our expenses. Focus is important, but life settlements are a viable option once we get to that stage.
Final Thoughts On Investing In Life Settlements
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.
