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Let's assume you've owned a universal life insurance policy for a number of years. You purchased it during your prime earning years, but have since retired. The premiums are becoming very onerous given your retirement income. You can't really afford to pay them much longer, so what should you do? Should you let the policy lapse and waste all those premiums you've paid over the years? No! A much better alternative is to sell the policy and gain back much of what you have paid if not more.
A life settlement is essentially the sale of a life insurance policy to a group of investors. It may sound a bit morbid, but they are investing in the idea that you will not live longer than a certain period. If you pass on early, they make a good return on their investment. If you live much longer than the actuarial tables reveal, they don't. Although this may seem like a strange transaction to many people, it is a fairly standard part of the life insurance industry.
How are these transactions priced? Well, there is no perfect formula because each situation is different and the price is set by the market. In general, we find that policies can be sold for between 10 and 30 percent of face value. This means that if you have a million dollar policy, the sales price will be between $100,000 and $300,000. That's a lot better than just letting the policy lapse!
Transactions of this size should not be handled off the cuff. If you are considering a life settlement, it makes sense to work with an experienced financial planner. By doing so, you will be able to establish that you are getting the best price for your policy and that your rights are not being trampled upon.
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