insurance

The ins and outs of life settlements

"The life settlement world is a murky swamp."

The market for life settlements -- the sale of your life insurance policy to a third party -- is expanding rapidly, as many senior citizens find themselves with policies they either don't need or can't afford. Consequently, this segment of the population is targeted heavily by salespeople marketing life settlements, and consumers will want to shop carefully to avoid potential drawbacks that include high prices and the inability to obtain a new life insurance policy.

Details of life settlements

Until about 20 years ago, if you had a life insurance policy that you no longer wanted or needed, you had two options:

  1. Surrender the policy back to the insurance company for its cash value.
  2. Let the policy lapse, possibly making all your premium payments worthless.

But now there is a third option: selling the policy to an entity other than the insurance company that issued the policy in a transaction called a life settlement. The life settlement company continues paying the premiums and receives the death benefit when you die.

Life settlements grew out of viatical settlements, which bloomed in the 1980s as a way for AIDS patients and other terminally ill policyholders to tap into some cash before they died.

Viatical settlements are arranged only for people with life expectancies of fewer than two years. But life settlements generally cover people 65 and older who have life expectancies of between two and 10 years.

The big picture

Many insurance salespeople express enthusiasm for life settlements, which can offer 10 percent to 50 percent more cash than surrendering policies back to the insurer, with payment ranging from 10 percent to 80 percent of the policy's face value.

"My feeling is that life settlements provide older individuals who own life insurance today with an alternative that creates real value for the capital they have invested in their policies," says Allan Goldstein, president and CEO of Insurance Design Center, a fee-based adviser in Deerfield, Ill.

"The settlement industry breaks a 100-year-plus monopoly that the life insurance industry had for what individuals could retrieve by surrendering their policies," Goldstein says.

But experts stress that life settlements aren't for everyone and note that consumers have to be careful not to fall prey to abusive sales practices. Numerous life settlements have ended up in litigation, including one entered into by TV talk-show host Larry King.

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"It has to be for the right situation. We're very concerned that clients be aware of what they're giving up if they do a settlement. If the life insurance policy is valuable enough for the buyer to buy, maybe it's valuable enough for the seller to hold," says Jordon Katz, president of JR Katz, a wholly owned subsidiary of independent insurance broker National Financial Partners in Northbrook, Ill.

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