Life settlements are US life insurance policies that are sold by elderly policy holders (average age at sale approx. 80 years) to investors. The seller of the policy receives a one off cash payment from the investor. This one off payment is substantially higher than the surrender value of the policy offered by the insurance company. The investor continues to service the policy (i.e. he continues to pay the premium payments) and in exchange receives the insurance benefits (face value).
More than 50% of outstanding life insurance contracts are terminated early.
The reasons are manifold, e.g.:
- The initial reason for buying insurance does not exist any more
(e.g. mortgage paid back, divorce, etc.). - The annual premiums are no longer affordable.
- An insured key person has left the company or has retired.
In the past a policy holder had only two options:
- Stop paying the policy premiums (lapse of insurance contract), or
- Surrender the policy for cash value (buyback value paid by insurance company).
Today in certain markets an alternative to lapsing or surrendering a policy exists:
selling the insurance contract in a secondary market to an investor.