It is easy to speak hypothetically about how life settlements are consumer friendly. After all, lapsing a policy for nothing makes no sense if you can sell it. Even surrendering a policy may be irrational in light of offers in the life settlement market that often are 5-10 times more valuable surrender value.
But life settlements add real value to the lives of real people each day. Take for example a middle-aged doctor who was diagnosed with advanced-stage cancer and suffered very serious income disruption. He fell behind on medical bills and was on the verge of losing both his home and practice. This doctor was able to sell his $1.5 million life insurance policy for $870k. As a result, the doctor was able to keep his home, reorganize his practice and put enough money away so that he could focus on his treatment.
Another example involves a veteran who was diagnosed with ALS. This woman, who had served her country, could not obtain the treatment that she needed due to financial constraints. The surrender value on her two policies was less than $8k combined. In fact, one of the two policies was a term policy, that had no surrender value at all. She was able to sell them for more than $265k, more than 30x the surrender value, and get the medical attention she needs and deserves.
These are not isolated incidents. The life settlement market routinely offers value to policy owners many times the surrender value of the policy.
Still, far too many insureds simply let their policy lapse and get absolutely nothing for it. What's more, regulation by the Department of Insurance in many states has clearly defined the rules of the life settlement industry, and rigorously protects those selling policies. In fact, 42 states now have specific life settlement regulations, and a number of states now require life insurance companies to disclose the option of a life settlement to those contemplating lapsing a policy. This shift illustrates that states, consumer groups, and the market at large recognize that the life settlement option allows insureds to monetize an unwanted asset in a regulated market.
It is generally better to have options than not. 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 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.
In addition to his role at Vida, Mr. Young is an adjunct professor of regulatory law at the University of Texas Law School, Board Member and Chair of the Legal Committee of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), and a frequent speaker at life settlement industry conferences. Prior to joining Vida Capital, Mr. Young was the President and CEO of New York Life Insurance Company's Broker-dealer and Registered Investment Advisor. Mr. Young graduated from Stanford University with Honors and Distinction and from the University of Chicago Law School with Honors.