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With economic instability, life settlements are attracting more public interest. A life settlement is a financial transaction between the policyholder and a third party, where the policyholder sells their life insurance policy to a third party. The offer is attractive because the policyholder gets more than the cash (surrender) value offered by the life insurance company. In return, the third party pays all premiums, and becomes the beneficiary of the insurance policy. When the policyholder dies, the third-party beneficiary receives the full amount of death benefits. Both the policy holder and the third party (who makes a profit) benefit from this type of transaction. This secondary life insurance industry began in the 1990s, and was worth about $12 to $15 billion in 2007. Because it is of its lucrative proposition, it is predicted to grow in the next decade to more than $150 billion.

There are several reasons why a policyholder would allow his/her policy to lapse or surrender for its cash value. The beneficiary may no longer need the death benefits or there may be pressing financial circumstances that would lead the policyholder to trade off death benefits to a stranger (who becomes the beneficiary) for immediate cash.

How does the secondary life insurance market affect the life insurance industry?

If there were no secondary insurance market, the policyholder would have no other option than to let a policy lapse or surrender the policy. When this happens, the inherent economic value of the policy goes to the life insurance company. This would mean that a insurance company is no longer obligated to pay death benefits on this policy. It’s more beneficial for any insurance company for a policy to lapse because they receive premiums, but do not have to pay out death benefits. Potentially, this would allow the insurance company to offer insurance at lower premiums to their customers. Some industry analysts suggest that if policy lapses are high enough, they can increase the profitability of a company.

If everybody were to start selling off their insurance policy to third parties, there would be no policy lapses. Theoretically, insurance companies would lose their profit margins and begin raising life insurance rates in order to make up the difference. This would eventually lead to less competition in the industry and lower sales.

Some argue that insurance companies need not be afraid of the secondary life insurance market. Even if life insurance rates are raised, people will still continue to buy insurance knowing that it can be sold at a good enough price later on to fund their retirement. The actuaries of insurance companies, while calculating premiums, make sure they consider payouts to a certain percentage of insurers, thus covering their costs.

Who actually loses in a life settlement?

Before you sell your policy to a third party, consider who actually loses in a life settlement. The policyholder gets a good deal since they get more than the surrender value of the insurance policy, but is it really such a good deal? If your children were designated to be the beneficiaries, why sell your policy to a third party just because you can no longer afford to pay the premiums? Your children may be able to help you with premium payments without you having to sell your insurance.

Another aspect to consider when selling your life insurance to a third party is that the policyholder never knows who his beneficiary may be. It may wind up being owned by large financial institutions and hedge funds, or a questionable third party you don’t even know may be waiting for you to die. This might be a disturbing issue to some people who may not be able to sleep so peacefully at nights.

If it is a term life insurance policy, the third party is taking a risk because the policyholder must die within the stipulated term period. Usually, life-threatening circumstances cause people to sell their term life insurance policies to meet urgent cash needs. If it is a whole life policy, the third party may have to wait out the duration period between the time the policyholder purchased the policy to the time they actually receives the death benefits.

Conclusion

A life settlement should not be used as a means to get “free money” as there are certain risks involved. Remember, if you are using your insurance in the planning of estate taxes, a life settlement will dissolve your purpose. Life insurance settlements could be considered at times when liquid assets are urgently required and when all other options are closed.

Life insurance companies view applications for insurance as a risk analysis. Simply put, what is the risk that you will die during the term of the policy, an act that will require the insurance company to pay the death benefit? To determine this, there are seven general categories people look at.

1. Smoker vs Non-Smoker

Yes, those annoying anti-smoking commercials are telling the truth. Puffing on a coffin nail will shorten your life span and cause a host of health issues that can, well, put you in a coffin. If you smoke, you can expect to pay much higher rates for life insurance.

2. Blood – And You Thought Vampires Were Interested In It!

The number one killer in our country is heart disease. Upwards of 600,000 people die from heart problems each and every year. As you might imagine, this is of great interest to life insurance companies when it comes to evaluating health risks. To determine your heart health, they will look at your blood pressure, cholesterol and triglyceride levels. If they are high, your rates will be as well.

3. Checking Those LBs

Being overweight is not good for your health. That being said, so many Americans are overweight that life insurance companies have learned to be more liberal when considering this factor. After all, they wouldn’t have many clients if they excluded heafty Americans.

4. Income and lifestyle

Do you life a stressful life or not? Stress is a huge health risk. By evaluating your income and lifestyle, companies can asses whether the risk of you having critical health issues is higher or not.

5. Overall Health

Isn’t it interesting this is so far down the list of factors considered? As long as you don’t smoke, have normal blood pressure, acceptable cholesterol and triglyceride levels as well as normal weight, you are probably going to live a long and healthy life. Good for you!

6. Family’s medical history

If everyone in your family drops dead at 50 from some genetic issue, you are going to have problems getting insurance.

7. Hazardous professions and hobbies

If you work in demolitions, are a bomb maker or some such risky profession, the risk of you passing away suddenly are obviously higher. Given this, your rates will be as well.

If you want to minimize the cost of life insurance, you should give some serious thought to these seven categories. Get them under control and you can get your rates under control as well.

Having a great life insurance policy can be very beneficial for a family. Many people think of life insurance as just covering burial expenses and paying outstanding bills. insurance can actually help a family without someone having to pass away. Life policy can be used as an asset during one’s life and after their death. If you have children, a spouse, bills, or future retirement plans you should definitely look into getting a life insurance policy that fits your family’s needs. Unexpected things can happen in life and it is important for you to be responsible and prepare ahead for all of the things that could happen.

Life insurance can be used while you are living as an investment tool. You can get a permanent insurance policy that builds cash value. This means that the cash value that your policy has built can be borrowed against if an extreme circumstance should arise. If someone is hurt or if an emergency occurs it can be difficult to think about anything other than the situation at hand. When an unexpected event happens many people go into debt because they did not plan ahead. It can be comforting to know that you can borrow against your life insurance until you can get things back on track.

When you pass away a great life policy can give your family the money that they need to live comfortably and accomplish their dreams. If you have children you will want them to be able to succeed at life and accomplish all of the goals that they have set out for themselves. If they are college bound they will need money to help them to attend college and pay for expenses. Having a great life insurance policy can mean that they will get the money they need to be able to attend college. Your insurance policy will also insure that your spouse will get the money that they need to be able to keep the home running in the manner that it has been.

We all want to have a happy, healthy family. We want to do right by our loved ones and for them to be able to enjoy everything that life has to offer. When we pass away we do not want to leave them wondering how they are going to be able to pay the monthly bills or without the ability to go to college. Taking the time to plan ahead can insure that our families are protected and financially stable even if we are not here to do it ourselves. Having a great life insurance policy is essential not only for us but also for the future of our family.

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