Life Insurance Settlement Author:    Posted under: Life InsuranceLife Insurance Types


Life insurance settlement is the process involving the sale of an insurance policy by an elderly policyholder with only a limited life expectancy to a third party investor.  Typically, the policy will be paid for with an amount that is less than the policy’s face value but is more than the cash surrender value. In this scenario the policyholder, let’s call him Mr. Smith, for whatever reason, decides he doesn’t need or want his $1 million life insurance policy anymore. He may have, at one time, wanted to ensure that his children and spouse are taken care of in the event of his death, but now look at his policy as a waste of assets that he’d like to divest himself of. So now, said investor then pays a lump sum, amounting to $500,000. The investor now becomes responsible for paying the premiums of the purchased life insurance policy and is named the beneficiary of Mr. Smith’s policy.

Mr. Smith now is relieved of the financial responsibility of the life insurance policy and thinks he’s gone and got himself a winner deal. After all, he now has $500,000, when in fact he could no longer keep up with the premium payments for his life insurance policy. Obviously, he comes out the winner in the transaction, right?

Wrong.

What Mr. Smith did not think through was the fact that his kids could have gotten the $1 million after his death had he held onto his life insurance policy. Instead, the investor he sold the policy to will be the big winner in the end, while his family is left to pay for his funeral, debts and any estate taxes that need to be paid up.

This is the disadvantage many people see to life insurance settlements. If you are without dependents or debts, or estate needs, then by all means, a life insurance settlement may certainly benefit you. But for the person who has heirs, like Mr. Smith, you and your family will not stand to gain anything from engaging in a deal such as this.

Another growing and worrisome problem surrounding life insurance settlements today is stranger-originated life insurance (SOLI) schemes. These activities are typically initiated by investors, who in several cases have solicited seniors to purchase policies, fund the premium payments and then purchase the policies from them.

SOLI differs from life insurance settlements in that the elderly targeted by SOLI investors are offered to buy life insurance policies with the purpose of buying said policies from them in exchange for being named the beneficiary. SOLI is generally considered as illegal, and the ones who are hurt by such deals are the elderly people who agree to these types of transactions. They may lose the ability to purchase life insurance at all, or end up being sued and charged with theft by the insurance company that issued the insurance policy to them as a result of the exposure of the scam.

One other significant problem involving life settlements is the issue of suitability. The issue of suitability usually refers to the insurance agent selling someone an insurance policy they don’t need, or won’t benefit from. With regards to life settlements, it refers to an insurance agent’s advising someone to sell a life insurance policy that the policyholder clearly needs and whose family would stand to benefit from in the long run.

Then there’s the issue of insurable interest. Insurable interest is based on the principle that a person or organization may obtain a life insurance policy on the life of another person if said person or organization taking on a life insurance policy values the life of the insured more than the amount of the policy. Many jurisdictions have instituted legal guidelines for the kinds of family relationships for which an insurable interest is present, on the assumption that personal connections between family members make them more valuable to each other alive than dead.*

Unfortunately, insurable interest is no longer exactingly a component of life insurance contracts today.

Wealthy people who engage in life insurance settlements could lose in an even bigger way – if the life insurance company decides to dispute the insurable interest issue and subsequently wins, it would mean that the investors are now holding a worthless life insurance policy. They, in turn, will want to sue the estate of the person they brought the now ‘phony’ policy from for fraud and then seek reparation that is equal to the value of the policy had it held up.

As most targets of these types of transactions are the elderly, one must take every precaution when approached by people offering quick deals equaling quick profits. One has to think back to their reasons for obtaining the life insurance policy in the first place. Be wary of life insurance agents and financial planners who advocate life insurance settlements or SOLI and carefully think things through before deciding to hand over their policies as it will potentially leave their loved ones, the very people they sought to protect with the life insurance policy, in financial ruin in the end.

Sources:
* http://en.wikipedia.org/wiki/Insurable_interest
http://www.quatloos.com/life_settlement-life_settlements.htm

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