Move from  Buy & Hope to Buy & Know

In 1911, United States Supreme Court ruled in Grigsby vs. Russell that insurance policies are legally viewed as financial assets which may be sold to a third party at the owner’s discretion. Oliver Wendall Holmes opined that life insurance policies were a recognized form of “investment and self-enforced saving” and that to restrict their resale to those with insurable interest was to limit the asset’s value.

This court case is the foundation for the large and growing secondary market for life insurance in which policy owners can receive fair market value for their policies rather than accepting the usually low cash surrender value offered by the issuing insurance company.

A life settlement is the sale of an existing life insurance policy for more than its cash surrender value to a third party purchaser for a lump sum payment. The purchaser buys the policy at a discount to its face value and typically holds it until maturity (death of insured) at which time the investor receives the death benefit payable under the policy from the issuing insurance company.

A policy owner’s decision to sell a policy could be driven by a combination of factors that result in a change in life insurance needs or a need for liquidity, such as an income shock, a health shock, an increase in medical costs, a need for long-term care funding, a loss of bequest motive, or a change in estate tax law. Irrespective of the reason, the life settlement market endows policy-owners wishing to discontinue their policies the ability to realize the market value of their policies.

The amount paid in a life settlement is based primarily on the life expectancy of the person insured, the face amount of the insurance policy and its ongoing premium requirements. From the original owner’s standpoint, a life settlement typically is a more lucrative alternative to letting the life insurance policy lapse or surrendering it to the issuing insurance company, essentially turning a non-productive asset into a productive asset.