Life Insurance Settlements

Unneeded or underperforming insurance policy holdings? Ever thought or heard of a financial services valuation tool and strategy called life insurance settlements? Well, if not, the capital markets certainly have heard and taken notice. Life Insurance Settlement companies purchase unwanted or un-needed life insurance policies from individuals and ultimately collect the death benefits. These payments are passed on to third-party institutional investors who are looking for returns that are not correlated with
existing portfolios. A key component to this growth expectation is that business is conducted in a responsible manner. Poor sales practices by settlement firms could hamper growth and spark a new wave of litigation. At present, there is roughly $13 billion of total in force settlement business. While small compared to the $9 trillion of individual life business on the industry’s books, the settlement market has grown about eight times faster than non-traditional life insurance. This growth rate differential will continue and could expand over the next few decades, which will draw more attention to the settlement business and senior life settlement in particular.

Here is a description of the dynamics at work and a little background detail about process:
 A life insurance settlement is a transaction in which policyholders sell the rights to the death benefits associated with their insurance policies to third party settlement companies. In other words, this process in effect creates a secondary market for life insurance products – like life insurance settlements. The typical market for these products includes individuals over the age of 65 with life expectancies of 4-10 years.
 A settlement firm, representing third-party investors, or better yet, an institutional funder, will provide a cash payment to the policyholder that exceeds the cash surrender value embedded in the policy. From that point on, the original policyholder will have no further involvement or association with the policy.
 The life settlement firm will continue to make premium payments on the policy to the life insurer, until a death benefit is claimed.
 The death benefit will be collected by the settlement company and passed on to third party investors, who are likely interested in returns that are not highly correlated with their other assets. (Source: Corporate reports and Bernstein Estimates)

A life settlement, to summarize, is basically the sale of a life insurance policy at a price, higher than the cash surrender value. Many seniors are realizing the extraordinary benefits of unlocking the dormant asset value of life insurance, allowing them to better plan for their future through what is essentially newly-found money. Life insurance settlements are increasingly offering seniors viable options for their life insurance policies, and, as we are now seeing, more financial options can be rewarding indeed.