The practice of buying a person’s life insurance policy, also known as life settlements, became extremely popular during the 1980s when the AIDS epidemic erupted. As those afflicted with the deadly disease found it difficult to pay off medical expenses, investors swept in to buy their insurance policies.
The way life settlement works is that the investor agrees to pay the premiums on a policy while the initial policy holder gets a cash payment. The reward for investors is the payout associated with the death of the insured person.
In recent years, life settlement has become popular with older adults who may not want to pay for life insurance premiums on policies that will end up being useless.
According to the Life Insurance Settlement Association (LISA), many American seniors – typically those 70 years of age or older – are discovering that life insurance policies that once seemed appropriate, no longer meet their needs.
Life settlements are sold for more than their cash surrender value but less than their net death benefit. They can be an important option for those who may have thought that they had no options at all.
Rather than continuing to pay premiums on a policy that no longer serves its original purpose, life settlements offer consumers payoffs that can be significantly greater than surrendering a policy. They offer a reasonable and profitable exit strategy that addresses the financial objective of policyholders.
According to recognized analyst on life insurance products, Tony Steur, state laws and insurance regulations need to be considered before selling a policy. If terminally ill, a viatical settlement is the best choice and may offer different options than just a life settlement. There may also be tax implications since not all proceeds may be tax free.
Therefore, it is advised to contact your financial adviser before making decisions about your life insurance policy.