Life settlements are gaining in popularity, but critics are taking a sledgehammer to these controversial life insurance products. Are they right – or should they be debunked? BankingMyWay studies the landscape and separates myth from fact.
First the facts. More than 6,000 Americans turn the age of 65 every day, according to The Alliance for Aging research. Couple that with the fact that 90% of all life insurance policies lapse or are surrendered annually, according to the Life Insurance Settlement Association (LISA), and you have a wide-open market for life settlements.
In a word, life settlements allow Americans aged 65-and-up to sell their life insurance policies to investors. In return, they get a handsome hunk of cash while they’re still alive to enjoy it. According to LISA, life settlement payments totaled more than $8 billion since 2005. The association also says that, on average, a life settlement brings more than $304,000 more than the average cash surrender value of life insurance policy.
Sounds a like a good deal. But are life settlements for real? Let’s separate the facts from the myths:
Myth: Life settlements are only for the rich.
Fact: Life settlements are legit for anyone with a life insurance policy worth at least $50,000.
Myth: Most life insurance policies pay out.
Fact: According to Golden Gate Financial (full disclosure: they do sell life settlements), 85% of all life insurance policies never pay a death benefit.
Myth: Life settlements are unregulated by Uncle Sam.
Fact: Make no mistake, life settlements have a checkered past, and consumers did get ripped off by unscrupulous companies, especially back in the 1990s when life settlements first arrived on the scene. But things have improved. Right now, 34 states provide life settlement regulations, and six more have life settlement regulations in the political pipeline.
Myth: Anyone older than 65 can qualify for a life settlement.
Fact: Not quite. Life expectancy is the key ingredient in a life settlement deal. Consequently, insurance company valuators may deem a candidate “too healthy” meaning he or she will live too long, to make a life settlement deal worthwhile for an investor. Ideally, as morbid as it sounds, the longer a life settlement seller lives, the longer it takes the investor to get his hands on the life insurance proceeds. Maybe that’s why, according to LISA, the average life settlement client is a 76-year-old individual, usually with an ample life insurance policy.
Life settlements aren’t for everybody. But if you need to get your hands on some cash – especially give the lousy performance of the average investment portfolio over the past few years, life settlements should merit a closer look.
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