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What are Life Settlements?

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 [3], 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.

So what’s bad about life settlements? Since there is little regulation, you’d expect abuse. As Frank Keating, CEO of the American Council of Life Insurers, said in this PBS piece [4]: “This is a system that corrupts life insurance, wrecks the white-hat image and the reality of the industry and encourages people to buy a policy for short- term gain, but for long-term loss. You know, die as quickly as possible. You have a group of investors who can’t wait for you to die. I mean, what a ghoulish business.”

While I can understand that perspective, life insurance is a business. If a consumer can start a policy and make a smart business decision about it, I think you should let them. If they no longer want to pay the premiums, they can get more than the insurance company is offering through a life settlement. The abuse part comes in, and this is the common complaint about annuities, when life settlement companies take advantage of people with a less than fair payout, though that’s hard to quantify, or throw in hidden fees and charges. That’s why regulation of this industry is probably for the best.