Feature: Myths and the Market

The media has offered conflicting views about life settlements–some stories say they are a great option for seniors but others say settlements are shady deals. To cut through the confusion, life settlement clients might do well to refer to those famous words of Mark Twain, who said, The reports of my death are greatly exaggerated.” Seniors could use the same sentiment to describe the life settlements market. Here are the most common myths about the market, along with the facts.

Investors are betting on my death. In a sense, that is true. However, it isn’t a bet that’s directly linked to you. Investors buy pools of life insurance policies – groups of policies from a number of policy holders. Those policies share similar characteristics, such as age, health history, policy death benefit amount, etc. All of the policies are sold based on this information only – investors will never know your name. The investors offer a price for that pool of policies that is above the collective surrender value of all policies, but below the actual death benefit. In other words, if your policy’s death benefit is $1 million and the surrender value is $250,000, investors weigh the life expectancy, premium costs, and death benefits to determine how much over the surrender value they will pay for your policy. They take over premiums, you get your benefit now, and they do take the chance that you will outlive your life expectancy.

I will receive huge financial payouts for selling my policy. Not always so, though you will receive much more in a life settlement transaction than you would by surrendering your policy to your insurance company. The life settlements market doesn’t have a guaranteed percentage payout. Like other investment markets, the amount of the payout you receive is based on several factors, including the amount of your policy’s death benefit, the number of policies for sale in the market, the average return of similar life settlements packages, etc. It is safe to say that the life settlements market can offer you an average return between 8 and 15 percent above the surrender value. In times where there are more life insurance policies for sale, the number will stay low. When there are fewer sales on the market, that percentage could increase.

Life settlement investors want my policy only if I’m not going to live long. Not so. Investors tend to pay much more for policy pools with short life expectancies. A better investment balance that includes seniors whose life expectancies are longer in nature are more appealing. Investors can give a fair price to the seller, though they do take on more risk that the pool of insureds will outlive the longer life expectancy periods.

Life settlements are illegal. False. Life settlements are legitimate ways for policy holders to sell unwanted or unaffordable policies. Since life settlements are governed by the same laws that insurance companies must follow, they are considered a safe means of attaining much-needed cash for whatever your purpose.