Cue the commercial: two kids gambol across the green toward Grandma and Grandpa, who are living their dream retirement since they sold their life insurance policy. The concept is not exactly new but has gained acceptance thanks to growing interest from investors seeking uncorrelated returns.
Selling a life insurance policy that is no longer needed or for which the premiums are unaffordable can be a viable option for some holders in specific circumstances, but the decision must be considered carefully in consultation with a trusted advisor and the transaction handled by a reputable agent or firm.
A “life settlement” is the broad term used to describe the transfer of a current life insurance contract from the owner to a third party for some specified consideration. Once the transaction is complete, the original owner receives the cash consideration and remains insured, while the buyer continues to pay the premiums and receives the death benefit when the insured individual passes.
A well-structured life settlement can benefit both the seller and the buyer of the policy. A typical payout would be more than the current surrender value of the policy but less than the ultimate death benefit. The investor is wagering on the life expectancy of the insured. If the seller dies earlier than his actuarial expectancy the investor profits, but a long and happy life for the insured means investment losses for the new policy owner. Obviously, the age and health condition of the applicant are major factors in determining eligibility and compensation.