By: Larry Rubenstein
Posted on LISA website – 1 April 2008
The amount of insurance an individual can buy usually exceeds the amount they need.
Many people overlook this important asset, which if managed effectively, could significantly boost their net worth. The emergence of a secondary market for life insurance is the driving force behind the ability to monetize your insurability.
Until the late 19680’s, life insurance companies were the only entities that repurchased their own policies. However the emergence of the AIDs epidemic spurred the capital markets to develop ways for patients to obtain cash from their life insurance policies while still alive, in order to pay their medical bills and other expenses. Because life insurance policies are typically assignable, policyholders are free to transfer ownership of their policies to third parties. The policy holders sold their policies to brokers called viatical companies who in turn sold them to investors. Policy holders are able to use the extra money to improve their quality of life in the final years while investors acquired a new asset class.
Life settlement companies determined the fair market value of the polices based upon the insured’s life expectancy and other factors such as the solvency of he underlying life insurance carrier and the rate of return required by investors. The life settlement companies pay the insured’s individual a percentage of the face value of the policy.
Some people find it unsettling to know that another party will benefit from their death. However, their concerns are unfounded. Life settlement companies do not know the name if the insured and the life settlement marker is not concerned about the life expectancy of any single individual. Investors base their decisions on the overall expected mortality of the general public. Policy holders can also take comfort from the fat the life insurance companies will not pay a claim if there is any foul play, or even suspected foul play by the beneficiary, Also life settlement companies are large established institutions that would not risk losing their entire business by participating in any illegal activities.
Tags: life insurance secondary market