| A relatively new segment of the life insurance | | | | order to reap the benefit of it. Well, not anymore. |
| industry has emerged which is creating quite a stir. I | | | | The same investors that made billions of dollars |
| am referring to the rapidly growing life settlement | | | | through the viatical settlement industry came up with |
| industry. Essentially, a life settlement is the sale of | | | | a plan so that people can profit from their death - |
| ownership rights to an existing life insurance policy | | | | before they die. A life settlement allows the insured |
| from the insured to a third party for more than the | | | | to receive a substantial lump sum - usually in the |
| surrender value but less than the death benefit. | | | | hundreds of thousands of dollars, while they are still |
| Advocates of the industry say that it's a win-win | | | | alive. So the insured gets a big cash payout to enjoy |
| situation for everyone involved. The seller gets | | | | while they are still alive and the investors get a big |
| immediate funds, and the buyer can receive greater | | | | cash payout when the insured dies. It looks like |
| sums upon the death of the insured. Sounds great, | | | | everyone is a winner here, doesn't it? Unfortunately, |
| doesn't it? Like most things, in order to understand it | | | | in order for there to be a winner there must also be |
| we must first look at its history. | | | | a loser. |
| The life settlement industry is a spin-off of the | | | | So who loses in this deal? Insurance companies. |
| viatical settlement industry. Viatical settlements came | | | | Insurance companies love it when a policy lapses. A |
| about in the late 1980's during the outbreak of the | | | | lapse is when the insured stops paying their premiums |
| AIDS epidemic. AIDS patients had exhausted their | | | | and as a result, the insurance company never has to |
| funds in order to pay for medical treatment. One of | | | | pay a death benefit. So if someone faithfully pays |
| the few things of value that many of these patients | | | | their premiums for years and years and then |
| had left was their life insurance policy. At this time, a | | | | suddenly stops, the insurance company gets to keep |
| group of investors decided that it made sense to | | | | all of that money and never has to pay out a dime. |
| purchase these policies. If someone had a $1,000,000 | | | | Unfortunately for the insurance companies, policy |
| policy that they were willing to sell for say $500,000 | | | | owners who would have allowed their policies to |
| and their life expectancy was one year, anyone could | | | | lapse in the past are now selling their policies. Upon |
| see that this was an exceptional investment. The | | | | the sale of the policy, the buyer is obligated to pay |
| investors would see a pre-tax profit of $500,000 | | | | the future premiums until the insured dies. Of course |
| minus any premiums they had to pay to keep the | | | | the buyer won't allow the policy to lapse because the |
| policy up. I can't think of anyone that would turn | | | | whole reason that they purchased the policy was to |
| down a 100% yearly return on their investment. This | | | | realize the death benefit. As a result, many insurance |
| practice grew into a billion dollar industry overnight. | | | | companies are forbidding their agents to advise their |
| Thankfully, medical advancements began to lengthen | | | | clients to pursue a life settlement. |
| the life expectancies of AIDS patients and instead of | | | | Life settlements can be extremely beneficial for |
| having one year to live, patients were living for 10 or | | | | some people. For example, if there are immediate |
| 20 years after their diagnosis. As a result, instead of | | | | financial needs, a life settlement is an excellent means |
| seeing a 100% return on their investment, investors | | | | to provide income. There is essentially no risk and |
| were seeing a 5% or 10% return. Suddenly, betting | | | | there are no out of pocket expenses. On the other |
| on death wasn't such a sound investment and the | | | | hand, life settlements don't make much sense for |
| viatical settlement industry vanished as rapidly as it | | | | some people. If an insured doesn't mind paying the |
| had arrived. | | | | expensive premiums to keep the policy up, they |
| Life Insurance has always been a very profitable | | | | should obviously keep the policy in order for their |
| business. There are numerous reasons to purchase | | | | beneficiaries to realize the full death benefit. As with |
| life insurance: tax-free savings, financial security for | | | | any investment opportunity, a life settlement should |
| dependents, I could go on all day. The only problem | | | | be carefully considered with one's advisors. |
| with life insurance is that you have to actually die in | | | | |