Turning life insurance settlements into securities is a natural, next step for the industry. How does that happen and what does it mean to you?
It all started with viaticals; diagnosed terminally ill people could sell their life insurance policies for cash to live on and pay medical bills until they died, presumably within a couple of years.. Later, life insurance settlements for nonterminally ill people began. But you had to be about 65 or older to sell your policy. Settlement companies would analyze your vital health statistics along with your life policy. Based on this, investors would bid to buy your life insurance policy from you.
*Value to sell:
If you cash in your policy to your insurance company, it may pay you the cash value or less. But your policy may be worth a lot more than that.
The size of your policy's death benefit and your chance of dying may workout to make it worthwhile for a buyer of your policy to pay you more than its cash value for becoming the owner and beneficiary of your policy. That's what life settlements are all about - a way for you to get cash for a life insurance policy you no longer need, other than surrendering the policy to your insurance company.
Apparently there's a lot of potential in making money helping people cash in - while alive- on their life insurance policies. So much so that some Wall Street firms think they can offer investors a chance to participate the life settlement arena. Here's how...
Right now, a typical life settlement investor buys your policy and holds on to it - perhaps paying premiums on it if need be - until you die. Then he gets the death benefit. The earlier you die, the better for him since his costs for holding the policy decrease. For analogy purposes, he's kind of like your banker who buys and services your mortgage in return for your payments over the next 25 years or so.
But that banker can resell your mortgage to 'Wall Street' firms to be packaged into mortgage-backed bonds. Your banker gets the money he loaned you and more, while those mortgage-backed bond buyers get to invest too for the return from everyone paying their mortgages.
Likewise, you can package life settlements into life settlement-backed bonds to be a potentially new 'security' to buy on the Wall Street. Your life policy buyer can resell your policy to the bond packagers to get a fast return.
Your ultimate benefit is an increase in the demand for your life policy. That generally works out better for you. It may seem to be a morbid enterprise, but so are funeral parlors.