5 things about life settlements

By Joe Light, Money magazine staff writer


(Money Magazine) -- 1. Your parents may be getting sold on these

In some retirement hot spots, such as South Florida, advertising for "life settlements" is ubiquitous. The pitch? Sell us your permanent (cash-value) life insurance policy and you can have a chunk of the death benefit now. In exchange, the company buying the policy becomes the owner and beneficiary and gets the full payout when you die.

CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.37%
1 yr CD 0.68%
5 yr CD 1.37%

Find personalized rates:
 

Rates provided by Bankrate.com.

Most settlement firms want policies likely to pay off within 10 years, so the elderly are prime targets. For those who anticipate running out of money, it's an appealing idea.

You'll probably hear this sell more often in the coming years: Wall Street is turning pools of insurance policies into tradable securities (as it did with mortgages), which will increase investor demand.

2. It's hard to know a good deal from a bad one

The life settlement industry is run by small investment firms, and there isn't a central marketplace to solicit bids. So there's no "going rate." A 70-year-old man with high blood pressure and heart disease could get offers from $116,000 to $162,000 for a $1 million policy, reports broker Golden Gateway Financial (compared with about half that if he surrendered it to the insurer). Thus, it pays for anyone considering a settlement to get several bids.

3. Brokers help obscure the process

Since many settlement firms won't deal with consumers directly, shopping around typically means going to one or more brokers. But brokers' fee structures vary widely -- from 1% of the death benefit to 15% of the difference between the offer and the policy's surrender value -- and they're not always transparent. That makes it tricky to compare offers, says Connecticut insurance commissioner Thomas Sullivan. So ask for the offers minus all charges.

4. Your insurer hates them

Insurance companies assume some policyholders will stop paying premiums -- meaning the firms will have to foot only a small surrender value, vs. a big death benefit. Since investors make good on policies that might otherwise lapse, insurers pay more death benefits, which makes them none too happy.

That's led many insurers to sweeten the payout for surrendering. Some even let you partially cash out but keep the policy active at a lesser death benefit. It's worth asking the insurer what it could do for you, and weighing that against settlement offers.

5. There are alternatives

Before taking a settlement, "you have to ask, 'Who will go unprotected if this policy is sold?' " says Steven Weisbart of the Insurance Information Institute. If it's your parents who can't bear the premiums, you may want to help. It'll be worth your investment if you stand to inherit, or if keeping the policy in force means you won't be financially supporting Mom when Dad passes on.

If your folks just need money but still could benefit from the policy, help them consider other options, such as selling their home or taking out a reverse mortgage.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.36%4.24%
15 yr fixed3.39%3.26%
5/1 ARM3.36%3.27%
30 yr refi4.34%4.22%
15 yr refi3.38%3.24%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 8:23pm ET
Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.21 0.00 0.00%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17

Sections

Spencer has been a supporting member of the "Good Morning America" cast for the past three years. More

Obamacare sign ups hit 8 million, though final enrollment remains to be seen. More

Office for iPad move is a symbolic victory for Nadella's Microsoft, but the company is still weighed down by many of the same old issues. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

As Detroit moves closer to reaching a bankruptcy deal, retired civilian workers are poised to be left worse off than firemen and police officers. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.