Buying and owning life insurance is probably not high on your bucket list. And no wonder — after all, it is a transaction that heavily favors the life insurance company. Once you have been cajoled into buying life insurance, the insurance company turns around and requires you to prove that you don’t need it. You are expected to provide evidence that you are in good health and are not likely to die anytime soon. Then, once the policy is issued, you have the privilege of sending your money to the insurance company, year after year, for as long as you live. The only way you have a chance to “win” under this deal is to die. If you drop the policy before you drop dead, the insurance company is the big winner. And, statistically, that’s what happens, as only a tiny percentage of all life insurance policies issued ever result in a death claim. All the rest are terminated before death, again favoring the insurance companies.
This has been the basic premise of life insurance: If you buy the policy and live, the insurance company wins, and you lose. Only if you buy a policy and die do you “win.” But recently there has been a development that changes this equation. It now may be possible for you to win while you are still alive. The way for that to happen is by selling your life insurance policy to a third party.
Let me explain.
Let’s say that years ago, when you had a young family, a mortgage and other financial obligations, you purchased a fairly large life insurance policy to cover these obligations in the event you were to die. However, you didn’t die. All these years you have dutifully paid premiums to the insurance company, but now the kids are grown and on their own, the mortgage is paid off and you and your spouse have accumulated a fairly nice nest egg for retirement. You begin to ask yourself, “Do I really need this life insurance now? Should I keep paying these premiums to the insurance company?”
Not many people know their best options for this type of situation. Often people keep paying the premiums out of habit, figuring they have paid all these years, so they might as well keep the policy, even if it is not really needed. Others will surrender the policy to the insurance company in exchange for any cash value that has built up in the policy, although this is usually an insignificant amount.
Until recently, these have been the only options available to those who felt they had outlived the need for life insurance. Then, about a decade ago, a few enterprising entrepreneurs discovered that the old life insurance policy you no longer need may not have value for you, but it could for them. They figured out a way for you to get extra cash from your life insurance policy while alive and for them to make money when you die, by collecting the death benefit.
The general term for this activity is called a life settlement. Here is how it works: Companies engaged in the life settlement market will offer to buy your life insurance policy for a lump sum of cash. (A life insurance policy is considered “real property,” just like a car or a home, and you have every right to sell it.) Ironically, contrary to when you purchased the policy, the more likely you are to die soon, the more value your policy has for these buyers. The life settlement companies take into account the size of the policy, the amount of premium due each year and the age and health of the insured (the older and sicker, the better) and then make an offer to buy the policy for a cash.
Once the policy is purchased, the life settlement company assumes the responsibility for paying the premiums to keep the policy active and also the risk that you will live longer than expected. When you ultimately die, the life settlement company collects the death benefits of the policy. Once the cost of purchasing the policy and the premiums paid to keep it in force are deducted from the death benefit, the remainder is profit for the company and its investors. This creates an interesting juxtaposition: Life insurance companies want you to buy the policy and live as long as possible, while the life settlement companies want you to sell your policy and die as soon as possible.