Addressing Two Myths About Life Settlements

Even with the life settlement industry growing steadily, with a market value of billions of dollars, several myths about it and life settlements in general persist. These two myths are the “it’s not worth it” myth and the “it’s not safe, you’ll get ripped off” myth.

More specifically, these myths can be true in some life settlement engagements and situations, but painting the whole life settlement industry with such a brush and dismissing life settlements as a possibility means that you might be leaving a lot of money on the table. Life settlements can be a lucrative source of immediate cash for retirement and just as safe as when dealing with established financial institutions – there are just a few things you need to remember and take into account when considering selling your life insurance policy.

First of all, due to their relative obscurity, financial advisors still tend to think of life settlements as something not worth exploring. That is if those financial advisors are familiar with life settlements at all. They may be dismissive of the idea, saying that it has nothing to offer that “simpler,” more “reliable” financial deals don’t have. These are misinformed opinions which can keep you from making a large amount of money from the sale of your unneeded or unwanted life insurance policy. Every year, more than $100 billion in life insurance face value lapses because policy owners don’t know that they can sell their policies, or are talked out of it by well‐meaning people who don’t know any better. On average, according to the Life Insurance Settlement Association (LISA), policyholders receive from four to seven times more through a life settlement than the amount offered by their insurance companies as the cash surrender value of their policy. That means that more than $100 billion is being forfeited to insurance companies every year. Life insurance is an asset like any other that can be liquidated and put to better use to improve the life of the policyholder immediately.

That is the key takeaway when weigh ng up whether selling your life insurance policy is right for you – doing your research and comparing offers before you decide to go forward is critically important to get a good deal.

The second misconception about the life settlement industry is that it is unsafe and unregulated. This is a holdover from the early days of the viatical and life settlement industries when regulations were indeed laxer, and unethical brokers took advantage of desperate people to make money for themselves. Nowadays, however, the industry is highly regulated in almost all US states and is represented by national and international associations of those involved that strive to educate and self‐regulate. Out of the 50 US states, life settlements are regulated in 42 of them as well as in Puerto Rico. This provides more than 90% of the US population with judicial protection when dealing with life settlements.

Of course, precautions should be taken to ensure as smooth a transaction as possible. Different people have different worries about life settlements. Some are worried about their personal information, such as medical records, being shared or sold by the life expectancy underwriters or buyers of the policy to other third parties. Others are concerned about receiving the money, or hidden brokerage fees.

For all of these concerns, the answer is the same: do your due diligence and defend your interests. This means discussing with a broker and potential buyer of your life insurance policy who will have access to your medical records. It means making sure that the full payment amount is placed in escrow before the transfer of the policy to the new owner. It means making sure that the broker you use lays out all their fees or the commission they take on a successful deal. And it means getting all of the above‐mentioned things in writing. Once you have the documents and contracts drawn up, you will be protected by laws both general and industry‐specific. The main thing to worry about is negotiating as good a deal as possible for yourself, as the “Wild West” days of the industry are over.

​In conclusion, life settlements often are – for the seniors who know about and take advantage of them – lucrative financial engagements that take place within an industry that is highly regulated in the overwhelming majority of the United States. Dismissing them out of hand as bad deals taking place in a shady industry is an attitude better left out of the analysis of your financial situation and what you can do to improve it. When done right, life settlements can be a great way to liquidate a life insurance policy you don’t need or want anymore and receive a handsome sum of cash in return – cash that you can use to boost your quality of life, pay off debts, or fund other assets.