The History and Future of Life Settlements
The history of life settlements is relatively short. Beginning in the early 1990's as viaticals, the rise of the life settlement market shortly followed. A viatical is the sale of a life insurance policy, by an insured, who has a terminal illness, that can reasonably be expected to result in death within a relatively short amount of time (many states vary as to the amount of time in which an illness is considered to be terminal, for instance Pennsylvania considers 24 months or less terminal, whereas Texas stipulates 48 months or less to be terminal). Viaticals were brought about, in some respect, by the AIDS epidemic of the early 90's. Individuals who had contracted the AIDS virus often times found themselves in dire straits, as the cost of medication and treatment was extremely expensive. This led to resourceful individuals finding that they had, in essence, an extremely valuable asset - a life insurance policy with a death benefit that could possibly be realized in a very short amount of time. The insurance policy served no good purpose to the insured, as it did not pay out while they were still alive. It would, however, be a viable investment for someone who wanted to assist the individual who had the illness by paying that person a lump sum for their policy, who in turn could afford the treatments needed for their illness, and at the same time make a return on their investment.
The beginning for the viatical business seemed to be bright. Investors helped those in need, and made a return on their investment while the individual with the terminal illness received the capital they needed to pay for the treatments for their disease. It wasn't long, however, until unscrupulous individuals realized that this was an un-regulated market and a hot bed for fraudulent activity. Medical records were falsified to make the insured appear to be closer to their demise than what they really were, and "investors" promised incredible gains on investments that they in turn sold to others, who many times were elderly people who could not afford to lose what they had invested. The sales pitch was simple, "what are the two most certain things in life?" and the age old answer was, and still is, death and taxes. Unfortunately, some of these promised returns never became a reality due to the fact that premium payments had to be continued in order to keep the policy in force, and the insured who sold the policy ended up living much longer than what was expected, due in part to false medical information and/or the advent of new treatments for their disease. Others, who claimed to know the business, promised "high returns" and "no risk", and simply took the money and spent it on themselves. This was, in large part, the reason for the "black eye" the industry got early on.
Now, ten to twelve years later, the industry has become much more regulated. Many states have "viatical settlement acts" (which also encompass life settlements) enacted, designed to protect the insured and to some extent the investor. These new regulations help states keep a "pulse" on the transactions within their state and safeguard against fraudulent activity.
People who need some of the benefits of the life insurance policy before they die, or who have life insurance policies that for whatever reason will otherwise lapse, should consider selling their life insurance policy by way of a "life settlement". This allows people to get cash out of their life insurance policy, in an amount in excess of the policy's cash value (if any), while they are still alive.
From viaticals came the rise of the life settlement industry. Enterprising individuals realized that billions of dollars in face amount of policies were being lapsed or surrendered simply because the insured no longer needed the coverage, or didn't want to continue with the premium payments. These contracts (policies) were being sold (or even given) back to the issuing insurance company for a fraction of their true value. Should somebody wish to make the premium payments to keep the policy in force, and pay the insured a lump sum value much more reflective of what the policy was worth, then that person could become the owner and beneficiary of the policy, and realize its benefits at the insured's demise. That is, in a nutshell, what a life settlement is. An insured sells the benefits of their policy to somebody else in order to realize a greater gain from what they've paid in so far. After the sale of the policy the investor must maintain all premium payments in order to keep the policy in force. It is really just a function of contract law; an insurance contract is being bought and sold much like mortgage contracts are bought and sold.
Life settlements have gained enough recognition as viable investment vehicles to attract institutional investors. Institutions investing in life settlements use "pools" of life insurance policies to create hedge funds. While exact returns are almost impossible to determine from one policy, a pool of policies creates returns based more on the law of large numbers. These returns, while still not exact, can be forecasted based on actuarial data and medical information provided by the insured. The attractiveness to the institutional investor is that a pool of life insurance contracts is not tied to the stock market or any other index, it is directly dependent on a given, independent of traditional financial fluctuations.
The future for life settlements as an industry looks good. An estimated $490 billion in face value is estimated to have been written on seniors age 65+ as per a 1999 study. Of this $490 billion, $100+ billion is believed to be conducive to a life settlement. In 2002 alone, an estimated $2 billion in face was settled in the form of a viatical or life settlement. As people become more aware of the alternatives for their life insurance policies, it is almost certain that the industry will continue to grow and life insurance companies will be driven to either pay more for the policies that are in force on their books, or create better suited alternatives for their clients to take advantage of. In the end, one thing is eminently clear, that the consumer will be the one who benefits from the proliferation of the secondary market for life insurance.
RTG Consultants, LLC is a licensed viatical settlement and life settlement broker providing services nationally. Please enter your policy information for a free life settlement quote. We also can be reached at 1-888-973-8377 with any questions. Thanks, and we look forward to assisting you.