June 15th, 2015
By: Darwin Bayston
From time to time, a misinformed person takes to his or her computer and publishes something about life settlementsthat confuses folks with false and misleading information. Unfortunately, in the era of digital media, one inaccurate article can live a long and destructive life on the Internet. When that happens, it’s important to call a timeout and set the record straight.
Don’t get confused by what you may read on other websites or blogs: life settlement transactions are highly regulated and have been upheld by numerous court decisions as perfectly legal and appropriate. In fact, there have been only two closed consumer complaints nationwide involving life or viatical settlements since 2012, according to the National Association of Insurance Commissioner’s Consumer Information Resource.
The confusion often arises when people misunderstand the difference between a life settlementtransaction (selling a life insurance policy that may no longer be needed or affordable) and life settlement investment (buying a life policy, or a fractional interest in a policy, for an investment return).
A life settlement transaction is the sale by the owner of a life insurance policy to a third party for an amount greater than its cash surrender value and less than the death benefit. The seller of the policy receives a cash payment; the buyer of the policy assumes all future premiums payments and receives the death benefit upon the passing of the insured.
Life settlements are both legal and regulated
In 1911, the U.S. Supreme Court issued a decision in Grigsby v. Russell, which recognized the rights of the life insurance policy owners to transfer ownership of their life insurance policies to a third party and paved the way for the birth of the life settlement industry in the U.S.
As of 2015, 42 states and the territory of Puerto Rico regulate life settlements, affording approximately 90 percent of the United States population protection under comprehensive life settlement laws and regulations. A life settlement offers a potentially valuable alternative to lapsing an unneeded or unwanted life policy back to the life insurance company.
There is an entirely separate issue that involves the decision to invest in life settlements by actually purchasing those policies, or fractional shares of one or more policies. Indeed, this is where controversy and investor problems have emerged when companies have solicited individuals to invest their personal savings in individual policies or fractional shares.
To be crystal clear, the Life Insurance Settlement Association is on record as opposing the participation of most individual investors in buying individual policies or fractional shares of policies due to the complex nature of their investment characteristics, including illiquidity, uncertain maturity and risks of multiple owners. We believe that life settlements are an attractive asset class and most appropriate for sophisticated institutional investors.
Here is the point: any news stories or litigation you hear about that is related to individuals investing in life settlements has absolutely ZERO connection to life settlement transactions, the sale of policies by the policy owners. To conflate those two entirely unrelated issues is far more than misleading; it is downright inaccurate and causes unnecessary confusion in the marketplace.
Millions of American seniors are nervous about their retirement years and are searching for financial security to help them pay medical expenses, rid themselves of debt or just enjoy their golden years. For those folks, a life settlement is an important option to consider as an alternative to lapsing or surrendering their life insurance policy. Indeed, a survey prepared for the Insurance Studies Institute found that 90 percent of seniors who have lapsed a policy would have considered selling it if they had known a life settlement was an option.
Our seniors deserve the truth about all of their financial planning options so they can decide for themselves and their families how to manage their personal assets. Don’t be misled by sloppy reporting you might see out there: life settlements are legally sound and highly regulated transactions.
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