Life insurance is one of the most misunderstood assets in America. While most people think of their policies as something that only pays out when they die, you can actually get cash from your policy while you’re still alive by selling it to investors.
This thriving marketplace, worth billions annually, offers senior policyholders an opportunity to get real money from policies they might otherwise cancel or let expire. To understand how it all works and whether it might be right for you, let’s take a closer look at the secondary market for life insurance.
WHAT IS THE SECONDARY MARKET FOR LIFE INSURANCE?
The secondary market for life insurance policies is simply a place where people buy and sell existing life insurance policies. Instead of canceling your policy and getting back a small amount from your insurance company, you can sell it to investors who are willing to pay more for it.
Policyholders benefit because they typically get four to seven times more than they’d get from surrendering. That can mean tens or hundreds of thousands of extra dollars in your pocket. Investors also benefit because these policies are noncorrelated assets whose returns aren’t tied to the stock market. Instead, they can estimate their returns using actuarial data based on life expectancy estimates.
WHO BUYS LIFE INSURANCE POLICIES? UNDERSTANDING KEY PLAYERS
The secondary market works through a team of professionals, each with a specific job:
The policyholder is typically someone over 65 who owns a life insurance policy they don’t need anymore, can’t afford or would rather turn into cash. Maybe the kids are doing fine financially, premiums jumped or money is needed for medical bills or retirement.
Life settlement brokers work for the policyholder. They shop your policy around to different buyers to get you the best price.
Life settlement providers work for the buyers who purchase the life insurance policy. They make offers to purchase policies.
Institutional investors are buyers who are a part of large funds or financial institutions. Like smaller investors, they purchase the policy, pay the premiums and eventually collect the death benefit.
THE LIFE SETTLEMENT PROCESS: FROM START TO FINISH
Selling a life insurance policy follows a clear path designed to protect everyone involved:
1. Getting started: First, you find out if your policy qualifies. The main things that matter are your:
- Age: Usually need to be 65+
- Health: Policies can be more valuable to investors if you have health issues
- What kind of policy you have: Whole or universal life are preferred
- How big the death benefit is: Typically must be at least $100,000
- How much the premiums cost: Lower premiums are more attractive to investors
2. Shopping around: If you qualify, life settlement brokers will get offers from different buyers. This takes a few weeks as buyers figure out what your policy is worth based on things like life expectancy and premium costs.
3. Reviewing offers: You’ll get several offers to look at. A good broker will help you understand not just how much money you’ll get but also when you’ll get it, any tax issues, and what strings might be attached.
4. Closing the deal: If you like an offer, you’ll go through a closing process similar to selling a house. There’s paperwork to sign and rules to follow. Once it’s done, you get your money (usually within a few days of closing) and the buyer takes over paying your premiums and becomes the beneficiary.
BROKER VS. PROVIDER: WHY IT MATTERS WHO YOU WORK WITH
A broker advocates on your behalf, while a provider advocates on their client’s behalf. As a result, choosing between a broker and going straight to a provider can make a significant difference in how much money you may get.
Brokers create competition between buyers, which can result in higher offers. They also handle all the complicated negotiations and paperwork, letting you focus on making the best decision. Working with a broker ensures you’re exploring all your options and getting the true market value for your policy.
RULES AND REGULATIONS: HOW YOU’RE PROTECTED
Forty-three states have laws protecting people who sell their policies. Rules vary by state, but may include:
- Brokers and providers must have licenses.
- Brokers must tell you exactly how much they’re making and who they’re working for.
- You have time to change your mind after signing.
- Your medical and financial information stays private.
- All the terms of the deal must be clear and in writing.
These protections have turned the life settlement business into a professional industry where you can feel safe doing business.
WHO BENEFITS THE MOST FROM LIFE SETTLEMENTS?
While every situation is different, life settlements are among the best life insurance cash-out options for:
- People who can’t afford premiums: If your premiums have become unaffordable, you can eliminate that financial burden while receiving a substantial cash payment.
- Estate planning: Families who want to reorganize their finances or make sure all children get equal inheritances find that selling a life insurance policy gives them cash to work with.
- Paying for care: With nursing homes costing around $10,000 per month, the money from selling your policy can pay for months of good care.
- Boosting retirement income: If you’re worried about having enough money for retirement, selling your policy can give your nest egg a significant boost.
THE BOTTOM LINE: DON’T LEAVE MONEY ON THE TABLE
The secondary market for life insurance is a legitimate, well-regulated way to get value from a policy you no longer need or want. From 2015 to 2021 alone, 1.3 million universal life insurance policies lapsed, according to the National Association of Insurance Commissioners. These lapsed policies represent a significant missed opportunity for policyholders and investors alike. Policyholders lose valuable assets they’ve paid into for years, with nothing to show for it. Meanwhile, investors miss out on stable investments that could diversify their portfolios. The secondary market bridges this gap, turning what would be total losses into wins for both sides.
Whether you’re a financial advisor helping clients maximize their assets or a policyholder wondering about your options, Life Settlement Advisors has the expertise to guide you through the secondary market. Learn more and see how life settlements can work for you.
