InvestmentNews: Life settlements seen increasing as population ages
The most common reason to buy life insurance is to provide income replacement for loved ones in the event of the death of a breadwinner. But as life goes on, children grow up and family needs may change. The once-valued protection can become a financial burden for an aging policy holder.
Or perhaps a client’s financial goals have changed. An irrevocable life insurance trust, or ILIT, set up years ago to transfer wealth and avoid estate taxes, may no longer make sense as current low interest rates require policyholders to pay ever higher premiums to maintain a universal life policy.
Older policyholders who don’t want to keep their life insurance, or who can no longer afford to pay the premiums, have three options. They can stop paying the premiums and allow the policy to lapse. They can surrender the policy and collect any accumulated cash value, minus any loans or surrender fees. Or they can sell their policy to a third party.
In a life settlement, an insured person sells a life insurance policy to a third party in exchange for an upfront cash settlement that is worth less than the death benefit, but more than the policy’s surrender value. The life settlement investor takes over the policy premiums and collects the death benefit when the insured dies.