Investors looking for information have no end of free advice these days. Depending on who is doing the talking, life settlements have been painted as everything from a worry-free investment to a tightrope stretched loosely over an alligator pit. The truth lies somewhere in between.
Life settlements – the practice of buying or selling life insurance policies – is neither risk-free nor the scourge on the investment community it’s made out to be. At worst, investors could lose a percentage of their investment. At best, the returns on life settlement agreements could be anywhere from 8 percent to 15 percent annually, depending on the investment package.
Some of the more common charges leveled at the life settlement market include:
Life settlements are not regulated by the securities market. Not yet. While regulations around life settlements are still being fleshed out, the SEC has taken action to bring more regulatory stability to the growing life settlement market.
Life settlements are regulated state-by-state. Absolutely true. And so are all insurance-related products. Everything from homeowners insurance to business insurance is regulated one state at a time by each state’s insurance commission.
Stranger-owned life insurance is a real problem. Yes, it was. But life settlement brokers and companies are more diligent than ever to ensure that stranger-originated life insurance (STOLIs) are kept out of the life settlement market. The practice is not common, and the industry has done a good job policing its ranks.
The market needs more transparency. And the life settlement market welcomes more transparency. To date, the life settlement market is quite transparent. Beyond the safeguards protecting the identities of policy holders and insureds, a life settlement agreement comes with several layers of transparency that allow both buyers and sellers to see all the pertinent details of each transaction.
Life settlement brokers take away transparency. To the contrary, life settlement brokers give both buyers and sellers plenty of transparency. Sellers are given multiple offers and buyers have access to more policies being offered for sale.
Insurance companies do not back life settlement deals. That’s true. Currently, approximately 33 percent of life insurance policies issued either lapse or are surrendered. The more life insurance policies sold in life settlement agreements, the less revenue for insurance companies. Insurers would naturally prefer to pay a surrender value that is a fraction of a death benefit. By selling policies to investors, sellers keep the death benefit in force.
Life settlements have no risk. Not true. Like any investment product, life settlements carry some risk. Typically the risks are lower than traditional investment markets, but the risk is still present. For example, investors buying packages containing a class of policies whose were suffering from AIDS experienced large losses when new drugs prolonged the lives of AIDS patients.
Life settlement purchase prices are overstated. Unlikely. Just know that on average, life settlement sales give sellers 20 percent to 30 percent of the death benefit value.
Buyers should research the life settlement market before making investment decisions. Like any other investment option, life settlements could help transfer investment risk and could potentially offer solid ROI.
Rare is the instance when a product or service delivers more than expected. Rarer still is when the return on investment is beyond expectations, especially in a recessionary market. Yet news out from the federal government has shed new light on the inherent value of the life settlements market.
Cash value life insurance carries an investment component along with death protection. Premiums paid in excess of mortality and administrative costs are credited to the accumulation value of the policy. The accumulation values illustrated in the policy at inception are based on an assumed rate of compounding or crediting. These projections do not assume changes in interest rates or equity markets in a variable policy. The last decade has seen some remarkable changes in interest rates. Actual cash values may not have grown as illustrated due to lower interest rates or higher policy expenses. Policy premiums paid, in some cases, may be higher than current policy values, particularly after applying surrender charges. What do you do now?
Fred has had his life insurance policy since he was 21. At 66, Fred assessed his policy against his current situation. His children are grown and have established careers. They make more money than he does, and his policy is no longer useful to him as coverage since he and his wife have prepaid their funeral expenses. Recently, Fred’s business has suffered through some significant losses due to the recession, and he’s considering his options. Should he take out a business loan with a mid-range interest rate or should he look for capital elsewhere? If Fred is smart, he’ll include the life settlements market as one of those options.
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