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The Basics of Life Settlements

Aug 4, 2008
Older Americans are struggling to make ends meet. As prices rise and investments erode, it is a struggle to keep up on payments.

Complicating the situation, many retired people are cash poor but asset rich. They have a good net worth on paper, but that value is tied up in non-liquid sources like their homes and not available for paying expenses.

This situation has inspired new financial products but it can be difficult to tell one from another, or even to tell which ones are legitimate. Many seniors hear about "life settlements" and wonder if these would be good sources of income.

What Are Life Settlements?

The importance of life insurance can't be overstated. Anyone with a family needs to be able to provide for their loved ones in the event of tragedy. Even a non-working parent needs life insurance, since the cost of hiring people to provide the same household services would be financially devastating.

Although some people choose less expensive term life insurance, others opt for whole life policies that carry an increasing cash value. The policy increases in worth as premiums are paid so is an asset in a person's investment portfolio.

As we get older and our children head off to lives of their own, we don't need the same level of life insurance. Historically, the only way to tap into the policy's value was to sell it back to the insurance company for the "cash surrender value". Unfortunately, this amount is a fraction of the policy's full death benefit and less than many people need for their future.

An industry has arisen to help people owning life insurance policies that only have value if they die. These organizations buy people's life insurance policies for a cash amount far greater than the cash surrender value and these transactions are called "life settlements".

Are Life Settlements Good Financial Options?

Life settlements in one shape or another aren't new but historically have been rare. It wasn't until guidelines released in 2001 by the National Association of Insurance Commissioners defined sound business practices that the practice really took off.

Since then, the industry has exploded and life settlements are becoming more common. A recent study found the industry has paid out $340 million to buy life insurance policies from their owners. Another study estimates there is approximately $100 billion of untapped life settlements still in the hands of eligible seniors.

However lots of bad investments have been popular, so the question remains: are life settlements smart choices? The answer for most people is yes. The practice has been endorsed by the Wall Street Journal, Time Magazine, The Economist as well as financial luminaries such as Warren Buffett.

If you have people in your life who are financially dependent on you, then keeping your current life insurance policy would be the better decision. However after 65, most of our dependents have moved on and there is no reason to keep such valuable assets anymore.
About the Author
Author is a freelance copywriter. For additional information on lifesettlements , please visit http://www.ifgins.com .
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