A life settlement is where the owner of a life insurance policy sells it to a third party. In general, the owner will sell it for more than its cash value, which the owner can get from the insurance company, but less than its payout at death. It sounds a little creepy, to be buying life insurance policies, but it’s something that can make sense for both the buyer and the seller. In many cases, the seller may not want to continue the policy or may not be able to make the payments on those policies. They can get cash from the life insurance company or they can sell it to a third party, who would become the new owner and continue making payments on the policy. By making a life settlement with a third party, they can extract more of the value out of the life insurance policy after years of premiums.
As you’d expect, this business is loosely regulated and I only happened upon it because the SEC was considering classifying life settlements as securities, which would put them under more scrutiny. Right now there is little and inconsistent regulation of life settlements, which makes many people, both in and out of the life insurance business, uneasy.
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