Life insurance settlement is where a policy owner sells his policy to a third party before he dies and his beneficiaries get the claim.  If I owned a $1 million life insurance policy I would sell it to a broker or investor for $500,000 before I passed away.  I would get $500,000 to spend in my retirement and the investor would receive $1 million when I died.  That is essentially how that works.

Reasons for Life Settlement Option

There are several reasons why someone would take a settlement.  First of all, they might not need the coverage anymore.  If you have a policy, but your kids are grown up and your spouse has passed, a person might not feel the financial need to have a policy anymore.  This is a great way to get more than your cash value back for your policy.

This option is also good to have for young policyholders.  You can buy life insurance now to cover your family.  But when you don’t need it anymore, you can sell your policy for money and retire off of it.  It becomes a nice investment strategy for young investors without a lot of money.  You can also kill two birds with one stone.  Get coverage and an investment product in one shot.

The thing you need to watch out for if you are looking to this as a long term investment is that this is a relatively new industry.  There isn’t much regulation around it and there many lawsuits that are currently being decided in the courts.  I’m saying all that to say I don’t know what the industry is going to look like in 40 years when you are ready to settle it.

Additionally, this may also change how insurance companies issue life insurance.  Insurance companies generally don’t like life settlement.  Prior to this, most people let the coverage lapse or turned it in for the cash value.  Now, they are having to pay out more claims than they are used to for these investors.  That might cause the premiums to go up on certain policies.  I don’t think the actuaries have figured out what the actual number value difference is yet to change the premiums, but it may be coming soon.

How It Works

There are several parties involved in life settlement.  First, there is you the policyholder.  We’ve already established your motives and incentives.  Then you have the investor.  This is the guy or company that wants to get your claim as a beneficiary when you pass away.  He will invest $500,000 now to get $1 million later.  That’s 100% return in the example above.

Then there is the broker.  This is the guy that finds the life insurance policies and the investors and puts them together, for a free of course.  This is a growing industry with much potential for anyone interested in getting involved.