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Someone you don't know may be willing to bet on your life! From the time I entered the professional world of life insurance 15 years ago, I have heard the two words "insurable interest"; the owner and the insured on a life insurance policy had to have a connection that made the purchase of life insurance purchase reasonable. Common examples of reasonable are a parent for the benefit of the family unit, a key man in a business, business partners for a buy/sell agreement, and transferring wealth from one generation to the next or for estate tax purposes. Until the introduction of life settlements, "for profit only" as an insurable interest has not been an option for individually owned life insurance. From the insurance company's perspective the whole idea is revolting. The insurance industry's pricing of their life insurance products is based in part on what is termed a "lapsed ratio". The historic percentage is 81/2%. Out of 100 policies sold more than 8 will lapse without the insurance company having to pay a claim. According to a recent article published in the N.Y. times, "If those lapsed policies had been sold to investors rather than canceled, insurance companies could have eventually paid our as much as $1 trillion, say analysts." Selling a life insurance policy should only be an option if one has decided that keeping the policy is out of the question. It stands to reason, if someone else is willing to pay those premiums to keep the policy in force then it must be a valuable asset. I am currently in the process of assisting a client in selling their policy. The client is a lady 72 years old and has had a term life insurance policy for $1,000,000 for 9 years. The policy is a ten year level term that she has to convert this year if she chooses to keep the coverage. She has been paying premiums of approximately $4,000 a year. If she converted the policy and kept it for the life of the policy she has to be willing to pay premiums of $36,000 a year. After consulting with her accountant and advisors she has decided to sell the policy. My expectation is that she will receive a check of more than $250,000. In another case, a gentleman age 72 owns a $300,000 universal life policy. It is no longer possible to continue paying the premiums. The cash value is $1,800. Surrendering the policy would mean a check from the insurance company for $1,800; selling the policy means a check for $19,000, and the check is arriving just in time to replace the wore out air conditioner. Typically those looking to purchase life insurance policies for investment purposes are looking for face amounts of $300,000 or greater, ages 6o and older with life expectancies of less than 15 years. The policy must be in force at least 2 years to get past the 2 years of contestability. Medical examinations are not required because the offer is based on the medical records and actuarial tables that estimate life expectancy. Funds from a life settlement can generate investment dollars, be used to purchase an immediate annuity that creates an income stream for life or for the purchase of long term care insurance to preserve ones ability to receive quality health care at home rather than be forced into a nursing home because of a lack of financial resources.
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Newsletter
2007