October 30, 2020
This article originally appeared in Retirement Daily on TheStreet.com.
For more than two decades, life settlements have occupied a distinctive niche within the insurance and financial services markets. A life settlement is the sale of a life insurance policy to a third party for its market value. In the transaction, the seller receives a substantial payout, and the buyer becomes the owner and beneficiary of the policy.
Life settlements offer an appealing and valuable alternative to policyowners who are very likely to be faced with surrendering their policy to the issuing company, often for little in return, or letting it lapse entirely and receiving no value in return. In fact, according to 2019 life insurance industry data, 92 percent of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered, and, therefore, did not pay a death benefit. In a life settlement, these same policyowners receive “a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy,” according to a report by the National Association of Insurance Commissioners.
For much of the past 20 years, life settlements have primarily been an option for seniors who have had a decline in health since their policy was first issued. But recently, eligibility criteria for life settlements have expanded to include healthy seniors. This means that now seniors without impaired health can benefit from a life settlement when faced with lapsing or surrendering their policies.