I’ve made no bones in the past about my issues with the life settlement or viatical market. In addition to the fact that many life insurance companies are opposed to the practice, I have not been convinced that it is an ethical practice.
The idea of someone in poor health selling their term life insurance policy for a discounted amount of cash, at least to me, has that “preying on the sick” feeling. More than one study has shown that in most instances the family of the insured would have been better off to keep the policy and convert it themselves in order to get the full death benefit. It’s no wonder that families aren’t encouraged to be part of the sale discussion in this process.
Anyway, suffice it to say that the reasons for not recommending life settlements as they have been done in the past far outweigh any reasons to recommend it.
I have just recently started reviewing information on a different take on life settlements that may (may not) be something I would present to a client. The jury, for me, is still way out on this, but I wanted to share some of it anyway.
With this new structure, a life settlement or payout on an existing term insurance policy would only be considered if the old policy was coming available for settlement due to the purchase of a new policy. My understanding is that a client would actually have to have a new policy in force in order to be approved for the settlement.
As opposed to viatical sales that typically involve people in very poor health, this life settlement process would actually require someone to be in good health to be approved for a new policy. The settlement would not be the big bucks percentage of the death benefit seen in viatical sales, but rather a percentage of the premiums paid into the old policy. That takes the flashing the big bucks aspect out of the equation.
This new process would also require that the client complete the conversion of the old policy before it is purchased by the settlement company. This is a gray area for me as it appears to be an attempt to waltz around the issue of insurable interest on the conversion. There has been talk by congress of changing the tax free status of life insurance that has gone through a life settlement, and with the conversion and transfer of ownership happening separately it appears that it might fly under the radar of what congress is concerned about.
Bottom line. Still opposed to life settlements. I think in the long run they have the ability to damage one of the few bright spots in our economy, the health of our life insurance companies.