Death Bonds, Morbid Investments, and other short-sighted parenthetical references have been made about Senior Life Settlements in the popular and financial press, emphasizing only that the Life Settlement asset class is ghastly and ghoulish. All too often, only a part of the story gets told. That is certainly the case here.
News and information comes at us at a torrential pace. We pick off the bits and pieces that resonate and we call ourselves informed. In reality, we are merely taking a sip from a fire hose. The Senior Life Settlement story is worth a deeper look.
My challenge here is to change your mind, not by bending the story but by telling you the truth. The hypothesis I intend to prove in this post is that Life Settlements are actually a socially beneficial practice that can improve the financial lives of the senior insureds selling their policies.
The white elephant in the room is that someone has to die in order for them to pay out. That's true. If you just can't get past that, I get it. Move on. That is the business of the life insurance industry. Life insurance creates a liquidity event when someone passes to replace lost income or wealth. We all know that.
I have to go a little tangential on you here to prove the point. By way of familiar example, maybe after you graduated from college and launched your career, you went out and bought your first new car and a house to go with it. Some time passes, you get married, have your first child and the walls start closing in on you. It's time for a bigger house and an SUV. My point is that over time, circumstances and needs change.
There is an open, competitive market for residential real estate and automobiles that allow you the ability to seek the best price you can get for your home or car when it comes time to make a change. Those assets are freely transferable at the will of the seller and an agreeable buyer to transact in a mutually beneficial manner.
So how would you feel if the right to seek the best price was taken away from you? What if you could only sell your home back to the seller or your car back to the dealer and they alone set a non-negotiable price and your only options were take it or leave it? Well, for most of the life insurance industry's history, that's the way it worked. The new vocabulary word for the day is "Monopsony."
A monopsony is an economic term that means there is only one buyer with absolute pricing power over multiple sellers.
The life insurance industry has only ever offered two options to an insured who has a need or desire to dispose of a life insurance policy that no longer suits their needs or their purchasing power:
- Stop paying premiums and lapse the policy worthless, or
- Accept the life insurance carrier's non-negotiable surrender offer to walk away.
I am not here to disparage the life insurance industry, as I am a true believer in the value of life insurance purchased to replace economic value. However, I am a bigger believer in a free market economic system that innovates improvements to a flawed system. The life insurance industry's lapse or surrender system is flawed. The Life Settlement industry is a beneficial innovation to ameliorate this design flaw.
In simplest terms, a Life Settlement transaction for a senior seller of a life insurance policy is one more option to maximize the value of an asset that they would otherwise be denied if the life insurance companies had their way. There's plenty of examples on the internet of life insurance lapse rates if you care to look it up, but suffice it to say, for the right candidate to sell a life insurance policy, ignorance of the settlement option is akin to simply stop paying your mortgage on your home and walking away from it or leaving your car parked on the street when you need to upgrade. When is one more option ever a bad thing?
The Life Settlement industry makes a liquid market for senior sellers of life insurance policies above the insurance carrier's surrender offer but less than the face amount. By senior, I mean typically age sixty-five or greater. That's retirement age when we start depending on savings and investments to get us through to the end of our economic lives.
When hard times hit, the life insurance premiums are one of the first things to go to create space in the household budget. To be fair, it's not just the disenfranchised that sell their policies. There are myriad reasons why a policy is no longer suitable; regardless, shouldn't the policy holder have the right to decide for themselves how to get the most value from it?
And another misnomer about this apparently hideous industry is that it's predatory and unfair toward seniors, as if men in trench coats are standing over nursing home patients forcing them to sign away their rights.
Despite the fact that the Senior Life Settlement industry is regulated in all fifty states and Puerto Rico, a Life Settlement transaction is a personal choice made only by the insured. When you're the one paying the premiums, only you know whether there's value there to continue servicing the policy for the purpose for which it was originally intended.
The only other party to recognize that the settlement option may be appropriate to discuss with the policy holder is the agent. He/She is of course notified by the carrier that a premium payment has been missed and a policy is in peril of lapse.
Of course, if the agent is a responsible steward of his/her clients' economic well-being, they have communicated with their clients about their wishes and available options.
There's a problem here too. In many cases, an insurance agent may be vilified by their respective carrier for drawing outside the company lines to educate their clients about the Life Settlement option. In some cases, this is a crime punishable by dismissal from gainful employment. Only Georgia has laws on the books protecting agents from doing the right thing. In my book, this is a lie by omission.
I certainly don't want to just hit the high points here to suit my own purposes. There are tons of qualitative resources on the internet discussing Life Settlements' benefits and drawbacks and many insurance companies have taken the initiative to build in many living benefits in their policy designs to cover long-term care and other economic potentialities. Talk to your agent about your specific policy and your options therein.
But if you are looking for a lump sum payment to maximize the value of your life insurance asset, www.lifetrustllc.com and www.lisa.org are two really good places to start learning about your options in the Senior Life Settlement market.
It's really easy to disconnect your rational brain from this discussion and just go with your gut instinct that someone should not profit from someone else's death and write this concept off. But if you're going to be fair and look at both sides of the Life Settlement value proposition, put your parents or grandparents in the story and see how you feel. Make up the story however it suits you but I would certainly want my Mom and Dad to be comfortable and capable financially in their golden years rather than do without because of what they might want to leave for me.
Death is not a bet. It's not an option. It is the one inescapable truth all human beings must face. On the other hand, life and its quality therein is the summation of our choices and having more of those, is better.
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