“Why would a company buy your life insurance policy?” is often one of the first questions we’re asked. Unlike traditional investments tied to the stock market or interest rates, the value of a life settlement is largely independent of market fluctuations. Instead, it hinges on factors such as the insured individual’s life expectancy, the type of policy, and the associated costs of maintaining that policy.
Companies view life settlements as predictable investments because they can estimate the return, typically a target of 10-18%, based on actuarial data. This non-correlation with market volatility makes life settlements an attractive option for diversifying investment portfolios and securing stable returns.
Understanding Life Settlements
A life settlement involves selling your life insurance policy to a third party for a lump sum payment that is more than the policy’s cash surrender value but less than its net death benefit. The purchasing company then takes over the premium payments and receives the death benefit when the insured individual passes away.
Reasons for Selling Your Policy
- Immediate Financial Needs: Policyholders may have urgent financial needs that require immediate cash. This could be due to medical expenses, debt repayment, or other significant expenditures.
- Underperforming Policies: Some policyholders find that their life insurance policies are no longer performing as they had hoped, or the premiums have become too expensive to maintain.
- Changing Financial Goals: As people age, their financial goals and needs can change. What was once a critical component of a financial plan may no longer be necessary.
- Better Investment Opportunities: The lump sum received from a life settlement can be used for other investments or opportunities that might offer better returns.
Why Companies Buy Life Insurance Policies
From the perspective of the buying companies, life settlements are an investment opportunity. Here are some of the key reasons why companies engage in purchasing life insurance policies:
- Predictable Returns: Life insurance policies offer a predictable return on investment. Companies pay a lump sum upfront and continue to pay the premiums, with the expectation of receiving a larger death benefit payout in the future.
- Diverse Investment Portfolios: Life settlements add diversity to investment portfolios. They are not correlated with traditional market investments, such as stocks and bonds, providing a hedge against market volatility.
- Favorable Returns: The potential for high returns makes life settlements attractive. Even after accounting for the premiums paid over the years, the death benefit can provide a substantial profit.
- Actuarial Calculations: Companies use actuarial science to assess the risk and potential return of purchasing a life insurance policy. By evaluating the insured individual’s health and life expectancy, they can make informed decisions about which policies to buy.
How the Process Works
The process of selling a life insurance policy typically involves several steps:
- Evaluation: The life settlement company evaluates the policyholder’s health and life expectancy, the policy’s terms, and the premium payment schedule.
- Offer: Based on the evaluation, the company makes an offer to the policyholder. This offer is usually more than the cash surrender value but less than the death benefit.
- Transfer of Ownership: If the policyholder accepts the offer, the ownership of the policy is transferred to the company. The company then becomes responsible for paying the premiums.
- Payment: The policyholder receives the agreed-upon lump sum payment.
Ethical and Regulatory Considerations
The life settlement industry is regulated to protect consumers. It’s essential to work with reputable companies and ensure that the transaction is conducted transparently. Policyholders should also consider the tax implications of selling their life insurance policy, as the proceeds from a life settlement can be subject to taxes.
Selling your life insurance policy to a company through a life settlement can be a strategic financial decision, providing immediate cash and alleviating the burden of premium payments. For companies, these transactions represent a calculated investment opportunity with the potential for significant returns.
If you are considering a life settlement and would like to find out if you are likely to qualify, please give us a call at 800-973-8258.