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.

The United States Government Accountability Office of the federal government has taken an interest in the life settlements market recently, releasing a report outlining the current life settlements market, regulatory challenges, and recommendations going forward. The news was intriguing – life settlement companies surveyed reported that on average, consumers receive nearly eight times the surrender value of their life insurance policy in a typical life settlement agreement. For life insurance policy holders looking to find value in a stagnant market, the news couldn’t come at a better time.

In a tight financial market, consumers are looking for ways to cut costs. Also, those things that were once affordable have become a strain on the budget. The life settlement market has offered an alternative to cashing in a life insurance policy or worse, allowing it to lapse, which causes policy holders to lose all their premium investment. Because the return for those selling a policy in the life settlements market is so high, policy holders can not only alleviate a costly premium payment, but also bring in additional cash when it’s most needed to pay for long term care insurance.

That said, life insurance policy holders should not take the decision to sell their policies lightly. You as a policy holder need to understand how the sale could affect you:

• Prices are not guaranteed. Just because today’s life settlement market is bringing a large return does not mean your policy will fare the same. By and large, such settlements will net you a greater return than surrender, but many factors determine price on the life settlement market. Review your policy with a life settlement broker to understand what to expect.
• Getting more life insurance later is not always possible. Nearly 35 percent of all life insurance policies sold lapse. Insurance companies do not look favorably on life settlement deals because a policy that doesn’t lapse costs them money. Some insurers have begun to deny coverage to customers who have sold a policy in a life settlement deal. If you need life insurance coverage, talk over your options with a life settlement broker.
• You’re selling your death benefit. As a policy seller, you should understand what it is you’re selling. Your sold life insurance policy stays in force and still covers your life. However, the death benefit no longer belongs to you or your beneficiaries. Your sales price transfers the death benefit to the policy buyer.

Smart policy holders will review carefully their life settlement options with a qualified life settlement broker. The more you understand your rights and your options in a life settlement deal, the more likely you’ll make the smart choice that fits your lifestyle.

No one wins in a recession. Markets that have gained substantial ground in sound economies often lose momentum and, depending on several factors, could falter or fail altogether. So when the US economy hit an all-time low, it was no surprise to see all financial markets grind to a halt – including life settlements.

Be it fears of the economy, losses from traditional markets, or the reluctance to try new venues, buyers in the life settlement market laid low in late 2008 and most of 2009. The result – an influx of sellers and a buyer’s market. Prices paid went down, and the market began to feel the pinch of the national economic meltdown.

The good news is the life settlement market may have faltered, but it was far from failing. Even in the hard times, buyers turned to the market looking for a way to recoup losses felt in other investment areas. The result – while the payout to sellers did decrease, sellers were still able to realize a bigger payout for their life insurance policies than they would have received via traditional policy surrender options. And life settlement offers remained fair to both buyer and seller, even during the recession’s low points.

The better news is that the life settlement market has shown signs of a strong recovery. Experts note that new buyers are beginning to enter the market, and life settlement sales are increasing. Whether you’re a buyer or a policy seller, the capital and the opportunity is there.
The benefits for sellers:

• The life settlement market allows sellers to realize a more realistic market value for their policies. Insurance companies go a long way toward providing policy holders’ beneficiaries with sound benefit amounts. But if the policy holder no longer wants or needs the policy, neither the investment amount nor the benefit payout are realized.
• The return on investment for unused policies far outweighs an otherwise useless policy benefit. If your key person, whom your company purchased life insurance for, is no longer with the company, the life settlement market offers a great way to recoup that investment without the company having to surrender the policy.

The benefits for buyers:

• Buyers can spread their portfolio risks to more stable, better performing markets in an unstable economy. The fluctuations in the life settlement market are much less volatile than fluctuations in traditional stock, bond, real estate, and mutual fund markets. Buyers can realize steady returns and have a wide selection of policy pools to choose from.
• Life settlement offers are becoming more creative. As capital limitations hit the life settlement market, the ways in which buyers purchased life settlements adapted. Sales offers such as upfront payments with participation in the death benefit at the death of the insured have made the market much more buyer-friendly during the recession.

Whether you’re buying or selling life settlements, you should consult a life settlement broker to understand your options and current market conditions. Policy holders need to review current price estimates, and buyers should evaluate the types of life settlement structures available to them. Even in a tough market, life settlements remain a sound alternative investment vehicle.

The doomsday reports that litter the Internet disparaging the life settlements industry are often misguided and have little basis in the reality established amongst the legitimate participants in the industry. The “seller beware” caveat that most retiree’s are bombarded with is oft maligned. Yes, there are risks to the life settlements market, as with any investment option. No, the risks do not supersede the potential benefit of a life settlement transaction, nor are they solely borne by the seller.

So far, the main risks to sellers include a lower-than-expected sales offer and not dealing with a reputable life settlements broker. The seller can always decline settlement offers, and brokers can be vetted against NAIC insurance regulations to ensure compliance with licensure.

Industry estimates range on how many life insurance policies lapse (where no death benefit is paid out to the insured’s beneficiaries.) Conservative estimates say that 70 percent of all life insurance policies (both term and permanent insurance) written lapse before any benefits are paid. Instead of letting them lapse, policy holders are now opting to sell the policies on the life settlements market.

That has insurance companies understandably upset. The revenue once generated by lapsing policies has been impacted by life settlement transactions. That has a few insurance company spokespersons crying foul, warning sellers to avoid settlement transactions with observations such as the significant policy value lost during a sale – some claiming up to 75 percent of the policy’s death benefit.

And that’s true. A portion of the value of your life insurance policy is lost upon the sale of that policy to a life settlement buyer. However, there are certain situations in which it makes perfect sense to sell your policy in a life settlements arrangement.

Some of the situations in which a life settlement agreement could be ideal include:

Your policy is about to lapse. You cannot make the premium payments or your policy has become too expensive and unaffordable. If the policy lapses for failure to pay, you lose all your investment, including all premiums you’ve paid to date as cash values are typically drawn down to replace premium payments.

You no longer need coverage. When you bought the policy, you had no other financial means of protecting your family or your business from the financial repercussions of your death. An insurance policy made sense and offered you affordable protection. Has this scenario changed since you purchased the policy?

You don’t have beneficiaries. One of the primary reasons to own life insurance is to protect your family and your beneficiaries in the event of your death. However, circumstances may have changed and that beneficiary relationship may no longer be appropriate. Policies that made sense thirty years ago may be inappropriate today.

You have enough money to cover your expenses. Universal policies allowing you to grow an investment while protecting your beneficiaries gave policyholders the option to get a small return on the policy investments. However, you’ve now completed a successful career or business and you simply have outgrown the policy.

You’re looking to liquidate assets. Your beneficiaries are financially secure, your spouse has enough to live on or is deceased, and you could use extra money in your savings to pay for medical expenses or for retirement and travel. A viable way to obtain additional funds is to sell your life insurance policy to life settlement investors and use the proceeds of the sale however you wish.

Its important to remember that by definition, a life settlement will remit a lump sum cash payment that is greater than the cash surrender value that the carrier would pay out if a policy was surrendered, but less than the death benefit. If the settlement offers do not exceed the cash surrender value, then there is simply no transaction. A simple way to conceptualize this is by example. Say you want to sell your Cadillac, which is 2 years old. You take it to the dealer where you purchased the car and they negotiate a purchase price. You then advertise the car online. If a third party discovers the car online and offers more than what the dealer offered, you would want to sell your car to this third party. This is analogous to a life settlement, whereby a buyer wants to purchase your life insurance policy for more than what the insurance carrier would pay you for the policy via the cash surrender value. If no third party offer exceeds what the dealer offered, you would return the car to the dealer for their agreed upon price. This is analogous to surrendering your life insurance policy to the carrier for the cash surrender value.