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.