Imagine for a moment there exists
a world where several buyers stand ready and willing to purchase your car
at substantially more than its trade-in value, and you get to choose the
highest bid. No advertising, no price negotiating, and no expense to
you. Science fiction?
Actually, such a world now exists
for owners of life insurance policies that are no longer needed, no longer
affordable, or no longer serve their original purpose. The life
settlement industry has created a secondary market for policies intended
for lapse or surrender.
The life settlement industry was
spawned by the viatical settlement industry, which created a secondary
market for terminally ill policyholders who needed life insurance benefits
prior to death to pay for the costs of care.
Policyholders who would qualify
for life settlement are generally older than 65, have deteriorating health
but are not terminally ill, and have realistic life expectancies of
between 4 and 15 years. Qualifying policies will have face amounts
of between $100,000 and $5,000,000 and be beyond the contestability period
(which is generally 2 years from the date the policy was taken out.)
The creation of a secondary market
for life insurance could not be more timely. Substantial declines in
the equity markets coupled with near historic lows in short-term interest
rates have devastated the portfolios and income of many seniors.
Because of this "double whammy", these seniors may not be able to afford
the premiums on their current life insurance policies, and are forced to
consider lapse or surrender of these policies. A life settlement
provides the senior with an alternative: sell the policy to a 3rd party in
exchange for a lump sum payment in excess of the cash surrender value.
In 2002, life-settlement providers
paid approximately $340 million to acquire policies with an aggregate cash
surrender value of $94 million. This represents an increase of 262%!
The market for senior-held life insurance is quite large. It is
estimated that seniors currently own $500 billion in life policies of
which $100 billion would likely qualify for life settlement.
Secondary markets exist for
virtually every financial asset. Thankfully, that list now includes
life insurance.
Jake King is a Regional
Director in New England for Gateway Financial Distributors, a nation
organization that represents the leading, institutionally-funded life
settlemenT companies. If you have any questions about life
settlements, please e-mail
lifesettlements@mdtaxes.com .
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