Life settlements were born sometime in the late 1990’s and have evolved into one of the safest business investments for companies involved. With most investments there is always some type of inherent risk involved no matter how sound the investment seems. With this investment betting on someone’s death, the investment has been predictably paying off every time with an astonishing accuracy.
The life settlement industry is seeing incredible growth rates that started at barely a few million from small companies. An evolving old business is turning new heads as it has climbed from just millions to $2 billion in 2002, grew 200% to $6.1 billion in 2006 and is predicted it could grow 229% to $20 billion this year in 2008. The business is betting on people dying and pays people cash settlements to own their life insurance. Success rate on investment? Seems to be 100%!
Originally, a life settlement was meant to help people out that were severely ill or had fallen on hard times and couldn’t keep paying the monthly bill on their life insurance premium. It didn’t take long for companies to start realizing there was potential for big profits out there. In fact, it has been estimated the total potential market out there for life settlement packages reaches nearly $134 billion.
The way it works, starts out simple enough with the purchase of a life insurance policy. Obviously, the bigger the coverage the bigger the payout. For instance, if you were to have a policy for $1.5 million and you decided you were tired of paying the monthly payment, or you were sick and tired of living that dull retirement lifestyle, you could either surrender it for cash or sell it off to a life settlement company. To surrender your life insurance policy with the company you opened your policy with, you might see something like $235,000. That might not sound too bad but if a service is used to shop the policy around to life settlement companies it could fetch something like $480,000+.
While aging seniors, CPA’s, lawyers and trust officers are thrilled with the concept as it usually provides great financial solutions, insurance companies are grumbling on the sidelines as their investment looks less attractive. For life insurance companies their statistical models and calculations get a little haywire when the possibility of a policy lapsing due to non-payment and negligence is removed from the equation. With companies buying the policies and waiting on the death of their customers, it’s a sure bet that the policy payments will be kept up to date and when death arrives the payout will be certain. It’s possible that as a solution insurance companies may factor this into future premiums they offer new clients so that they can cover the policies that are converting to life settlements.
If it all seems too good to be true, as with anything, it can turn into a sour deal for the person selling their life insurance policy to a life settlement company. Just ask TV Talkshow Host Larry King
. Mr. King bought a $10 million dollar policy and sold it 3 weeks later for $550,000. What Mr. King found out later was that his policy could have been sold for much more and it would have been better if he would have maintained ownership. A lawsuit was filed because Mr. King found out he could have cashed in much more in his life settlement jackpot. So while Mr. King did get paid a sum of money, he was quickly pushed through the door and now faces the fact that someone out there owns a $10 million dollar life insurance policy on his life.
While the life settlement industry is truly on the up and up and people are making out well, there are some shady sides of the industry. The darker side of process is called a (STOLI) or stranger-originated life insurance policy. The proposition doesn’t work much different in cashing out of a life insurance policy but typically it targets wealthy seniors close to death. Companies approach the seniors with the deal of a lifetime; sign this paper, we pay you money, pay your premiums and in 2 years they will own your policy. The 2 year period is called the “contestability period” and after this point the policy can be sold on the secondary market. Congress and insurance companies are trying to
pass legislation to at least limit this part of the industry, where companies are jumping on wealthy seniors like hawks and fraud is rampant.
Regardless of the legal hurdles, red tape and road blocks the insurance industry and government is trying to place on the life settlement industry, it is growing fast and being noticed. Big investment firms and banks like Chase Manhattan Bank, Lloyds of London, Merrill Lynch and American International Group are investing heavily in creative ways in these markets. Another important fact to current growth and upbeat future growth in the death business, is the incredible growing number of seniors. By the end of this decade America will reach historic highs of seniors with the Baby Boomers retiring left and right for the next eighteen years.
With tough economic times being felt through the American economy, the life settlement industry just may see a spike in growth for people ready to bail out and cover their debt and their unruly mortgages. If financial trouble doesn’t encourage seniors to cash in their life insurance policies there are always cruises, luxury vacations and great restaurants to have that retirement of a lifetime. One thing is for sure, the businesses investing in these financial products won’t be going away because the odds beat Vegas and the stock market. For Business Shrink Radio show listeners and readers, have you considered or heard of a life settlement before? Do you plan to use this strategy in the future to cash out and live retirement with more pleasantries? Do you see this as an insult to the beneficiaries on the life insurance policy or any dangers with this method?
