What is a Life Settlement?

People can sell their life insurance policies to a third party for less than the face value of the policy. The third party hopes to profit by collecting the proceeds when the covered person passes away. Typical sellers are retired people who decide the cash settlement will be more useful now, while they live, than it will be to their heirs when they pass away.

For example, a policy owner could have a million dollar whole life insurance policy. Assume the policy has a cash value of $100,000. A third party may offer half a million dollars to buy the policy.

Of course, that amount is considerably more than the amount the covered person could cash his or her policy into the insurance company for. But it is still less than the third party would collect upon the policy owner’s death. In addition, the purchaser would continue to pay the premiums. If the policy owner can use the money for retirement expenses, and also be relieved of paying a premium every month, this may be a reasonable transaction.

Life Settlement Offer Amounts are Decreasing

Apparently third party purchasers depended upon credit in order to finance life settlements, and as credit got tight, sales declined by 20%. Meanwhile, the S&P 500 stock market index has declined by almost 40%. Many retirees depended upon market investments for income, so now the life settlement market has more sellers than buyers, and buyers are pickier about which policies they will purchase.

In the past, a healthy 65 year old could sell a large policy, even though the purchaser would not expect to collect the death benefit for 15 to 20 years. But morbid as it is to consider, polices from older people with shorter life expectancies will be more profitable for the buyers.

Life expectancies affect the life settlement market as much as the economy does. Many underwriters have increased their life expectancy calculations over the last few years, which means that possible purchasers may be even less likely to offer a settlement to younger retirees.

Should Policy Owners Still Seek Life Settlements?

Life settlements are controversial, but can still benefit some retirees who may be struggling financially. When the economy improves, the market for policies may improve, so if possible, it may be better to wait.

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