As a life settlement broker, every now and then I get an inquiry where someone has the idea that they’re going to apply for a new life insurance policy, and then turn right around and sell it to a life settlement company, but this doesn’t work.
For one, life insurance is not designed to be a get-rich-quick scenario, so if you’re healthy enough to get approved for a new life insurance policy, you’re probably too healthy to be considered for a life settlement.
Also, every life insurance policy contract comes with a 2-year suicide and contestability period which essentially says that if the insured dies within the first 2 years of the contract, if it’s a suicide the premiums are simply returned, and if the carrier were to discover any fraud in your original application they could contest the claim and possibly not pay it.
With this in mind, most states require that a policy is at least 2 years old, and if your state doesn’t require it, no investor is going to take on that risk, so don’t bother.
Life settlements are generally for people who bought a life insurance policy for insurance coverage, and after a while their needs have changed and they no longer wish to pay premiums anymore, so they look into selling their existing policy. Starting a new policy with the intent of selling it right away is just not going to work.
Each state has its own department of insurance, so depending on where the owner’s primary residence is, the laws set forth by that state’s department of insurance will have to be followed.
When it comes to accepting an offer on a life insurance policy, it’s ultimately the owner’s decision. Sometimes the insured believes they are the owner of the policy, but they may have put their spouse down as the owner, which may now be their ex-spouse, their business, a trust, etc. If it's a trust that’s listed as the owner, then a trustee must sign as the owner of the policy. And if it’s a business that owns the policy then it must be a business owner with a significant stake in the business that signs as the owner.
The closing process requires that certain legal requirements are met, and this is to help protect both the seller of the policy and the new owner. Each state is a little different, but there’s often a rescission period allowing for the seller to reverse the sale up to a couple of weeks after the settlement. Sometimes this rescission period is based on the signing of the contract, while others base it on the date on which you received the funds.
One of the buyer protections requires making sure the beneficiaries are aware of the settlement. If a family member passes away and the previous beneficiaries are expecting a large payout, they might be surprised to find out that they’re not beneficiaries of the policy anymore and may try to sue the new owner. The new owner wants to own the policy free and clear, so they will also be considering liens as well to make sure the policy has not been named to a creditor.
The short answer to this common question is yes, they can be sold, but the policy still must be within its conversion period for it to work unless the insured is terminally ill.
Conversion means the insurance company will replace your term policy with a new universal life contract that is considered to be permanent life insurance. By making it permanent, the new owner can manage future premiums and keep the coverage going if you live longer than expected. With a general term, eventually, the term will run out, and even though you can keep paying premiums, they often jump significantly in just a few years with the cost surpassing the death benefit over time. It simply does not make sense from an investment standpoint to invest in a term policy with all these potential risks.
Every life insurance company offers different products, and sometimes these conversion products are priced reasonably, and others are simply not. This is often the first step in figuring out if someone’s term policy is worth anything.
Whenever we can, we opt for the universal life product instead of the whole life product because whole life policies are considered to be much more conservative products and therefore are expensive and tie up a lot of cash. Universal life policies have a lot more flexibility in them, so you pay the minimum cost of insurance to keep the policy in force but don’t have to load up the cash value account that may only make 2% interest.
If the conversion illustration is priced reasonably well, we may get offers to buy it. Some funds are willing to buy policies with longer life expectancies while others will only buy shorter life expectancies, so it just depends on the market at that time.
Another common question is who buys life insurance policies?
The life settlement market is a multi-billion dollar industry made up mostly of institutional capital; think mutual fund companies and hedge funds, and there’s even individual and private capital too. Life settlements are considered to be an alternative investment, and therefore any investor, be it an individual, group, or fund that wants to diversify from the stock market will invest in alternative investments. If the stock market takes a dive, the life settlement market is stable and will not be affected by market swings.
Life insurance is considered to be a recession-proof industry, and as such, so are life settlements.
Most of these investor funds are small organizations with large assets, and do not have a large call center to receive inquiries from the general public, but rather rely on life settlement brokers to bring them cases.
A life settlement broker is the person or company who represents the seller of the policy and can comparison-shop for life settlement offers. The buyer pays the broker a commission if the sale is completed.
Sometimes sellers’ initial thought is that they want to save money and try to sell their policy themselves without using a broker. While I’m a DIY guy myself, this is not a good idea. In almost every case I work on where a client has tried to get their own offer, I’m able to get them significantly more. This goes back to most of the industry not having consumer call centers. It’s not like selling a used car where you can just walk into a dealership and get a decent price for your car. Buyers want to buy your policy for as little as they possibly can, so they will lowball their offer and try to get you to accept it. And when you don’t have a bunch of other groups looking at it, you have no competition and nothing to compare your offer to.
So do yourself a favor and let a broker help you get more money for your policy, even if they do charge a fee. You’ll still end up with more in the end.
FAQ
What regulations apply to the life settlement industry?
Life settlements are considered legal arrangements and now require that a licensed life settlement provider create and manage the closing documents for the settlement to ensure they follow the laws set forth by the Department of Insurance in the state where the seller resides.
How can I ensure that a life settlement provider is compliant with regulations?
Work with a life settlement broker to set you up with reputable life settlement providers, and make sure they are licensed in the state where the seller resides.
Are there any risks involved in selling my life insurance policy?
The only obvious risk is that nobody knows exactly how long we have. If you sell your policy and happen to pass away a few months later, the contract cannot be reversed. It’s important to note that it was likely determined that there was a very low probability of this happening.
References:
(1) https://content.naic.org/sites/default/files/publications-consumer-life-settlement.pdf
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.
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