Buying a home is one of the biggest decisions you'll ever make but imagine purchasing a home from a builder where the contract of sale specifies that, if you choose to sell the home at a later date, you may only sell it back to the builder. Years later, when you are ready to downsize and no longer want the home, you approach the builder and she offers you ¼ of the home’s market value. You are left with three possibilities: (1) keep the home you no longer want; (2) sell at a below market price to the builder; or (3) abandon the home for nothing. This is a no-win situation – for the homeowner.
Fortunately, we all know that is not how the housing market works. A homeowner is free to sell her home to any potential buyer at market value for the property. However, for more than 100 years, that is precisely how the life insurance market worked.
Before the life settlement market emerged, the three suboptimal choices outlined in the hypothetical home purchase above were the only options available to an insured. If the insured no longer wanted or needed an insurance policy, he could: (1) keep it; (2) surrender it to the insurance company for a fraction of its value; or (3) let it lapse and receive nothing. Unfortunately, most insureds historically have chosen the latter option, with the vast majority of insurance policies lapsing. In this case, the insured receives nothing after paying years of premiums, and the insurance companies receive a windfall profit, as they don’t have to pay out a death benefit, after having collected premiums.
With the emergence of the life settlement market, an insured now has the 4th option that the homeowner has – to sell the policy at a market-oriented price. So for those whose situation has changed and they no longer want or need a policy, they now can monetize that policy. Funds obtained from a sale can be used for necessary bills, medical care, retirement, or enjoyment. As with the funds from the sale of your home, how you choose to spend the proceeds from the sale of a policy are virtually unrestricted.
For some, holding a life insurance policy to maturity, or even lapsing it, makes economic sense. However, there are situations where lapse or surrender is irrational given the value of the policy and/or the insured’s circumstances, and the insured is better off having the option to sell. To learn more about options available to consumers who no longer need or can afford their life insurance policies, visit the Life Policy Owners section of the LISA website.
About the Author: Dan Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc , a well-established life settlement provider focused on maintaining transparency, risk management and rigorous process control in the purchase of life settlements. Magna is owned by Vida Capital, a vertically integrated asset management company providing longevity contingent investment solutions to institutional and individual investors. Dan is the Vice President, Asset Management and General Counsel of Vida.