Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(3 minute read)
Life settlements have become increasingly common over the past several years, with steady, rapid growth expected to continue at least through 2025. But why exactly is that? Because life settlements make money for everyone involved in the sale.
It’s clear how life settlements positively impact the policyholder: they can often sell their life insurance for at least four times more than what they would receive from an insurance company by surrendering the policy. Yet, you may be wondering how companies that buy life insurance policies make money. This article will explore how life settlement companies make their profits. But first, let’s review how life settlements work and who all is involved in a sale.
How Does a Life Settlement Work?
A life settlement is a term used to describe the sale of an existing life insurance policy to a third-party for a one-time cash payment. The original policy owner receives a lump sum payment, and the purchaser assumes the responsibility of making the life insurance premium payments. The purchaser becomes the beneficiary and receives a payout upon the death of the original policyholder. During the sale, there are typically a few different people involved, in addition to the policyholder.
What is a Life Settlement Broker?
A life settlement broker is a financial advisor who works on behalf of the policyholder. The broker is responsible for shopping the policy around and securing the best deal they can find for the policyholder. Life settlement brokers generally work on commission, and they receive a set percentage of the sale of the policy. For policyowners, this is a win-win. There is often no upfront fee that needs to be paid, which means policyowners won’t have to worry about out-of-pocket expenses. And, working on a set percentage incentivizes brokers to find the highest value for a policy.
What is a Life Settlement Provider?
A life settlement provider (or direct buyer) is a company that purchases life settlements from policyowners. While some life settlement providers purchase the policies on their own behalf (to keep as an investment), most purchase the policies on behalf of investors or other financial institutions. The business model of the providers is to buy low and sell the policy to the highest bidder. Keep in mind a provider (or direct buyer) is the buyer, and you get one bid.
Why do Companies Buy Life Insurance Policies?
Essentially, life settlements turn life insurance policies into a relatively stable financial asset with a predictable return. This is because the purchaser becomes the beneficiary to the policy, and they are able to collect the full death benefit upon the passing of the original policyholder. Let’s break this down into a more detailed explanation.
When life settlement buyers purchase life insurance policies, they’re doing so for less than the death benefit—but still at a much higher rate than policyholders would receive by surrendering their policy. For example, a buyer may purchase a policy for $150,000 on a $750,000 universal life policy. The difference—$600,000 in this example—is the amount investors receive as profits in the death benefit, less the premiums they pay to keep the policy active.
Providers then bundle life settlements and sell them to hedge funds, financial institutions, or other wealthy investors, as they would with any other financial asset.
Life settlements are considered fairly low-risk investments for life settlement providers and investors. While there is a small risk that the life insurance company goes out of business or refuses to pay the benefit, these are unlikely scenarios. Perhaps the greatest risk is that the original policyholder lives longer than expected and investors end up paying more money in premiums than they initially expected.
Evaluate your Policy with Life Settlement Advisors
Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. If you’re interested in a life settlement, the process is straightforward. Tell us a little about yourself—including your age, health, and your policy—by using our qualification calculator and then complete a life settlement application. Still have questions? Contact us today… we’ll be happy to answer them.
Life Settlement Advisors