NASD Investor Alert Cautions Investors About Life Settlements
Washington, DC — NASD today warned seniors about the potential pitfalls of selling their existing life insurance polices for cash in transactions known as "life settlements" or "senior settlements."
The transaction involves selling a life insurance policy that's no longer wanted or needed to a third party - a person or business entity other than the insurance company that issued the policy - typically for more than the policy's cash surrender value but less than its net death benefit.
"Life settlements are not for everyone," said NASD Chairman and CEO Mary Schapiro. "While they can be a valuable source of liquidity for people who no longer want or need their current policies, life settlements can have high transaction costs and can have negative consequences for your financial situation. And it is very difficult to determine whether you're getting a fair price for your policy. The best advice is to proceed with caution."
The NASD Investor Alert issued today – Seniors Beware: What You Should Know About Life Settlements – examines how life settlements work and the factors investors should consider when deciding whether to sell their life insurance policies.
Generally, the purchasers of life insurance policies are institutions called life settlement companies or life settlement providers. They may hold the policies to maturity (that is, the death of the insured person) and collect the net death benefits, or they may resell the policies, or they may sell interests in multiple policies to hedge funds or other investors. The investor selling his or her policy receives a lump sum payment – and the amount of that payment will depend on a range of factors including the investor's age, health and the terms and conditions of the life insurance policy. The purchaser agrees to pay any additional premiums required to keep the policy in effect and receives the death benefit when the investor dies.
The life settlement market has expanded rapidly in recent years, because life settlements have proven profitable not only for institutional investors that purchase policies, but also for the life settlement companies and brokers handling these transactions. Some studies suggest the potential market exceeds $100 billion. As a result, competition among life settlement companies has become increasingly intense, making that market prone to aggressive sales tactics and abuse.
Factors to consider before agreeing to a life settlement include:
- Ongoing Life Insurance Needs – If you're considering buying a new policy with the proceeds of the life settlement, you will need to determine whether you can get a new policy – and at what cost. Once sold, the old policy will still be in force and may affect your ability to get additional coverage.
- Determining a Fair Price – Because there is no transparent secondary market for life insurance policies, the best way to make sure you're getting a fair price is to shop around – by contacting multiple life settlement companies yourself or using a licensed life settlement broker who will shop your policy around on your behalf.
- Financial Impact – The lump sum payment you receive can be taxable, depending on your circumstances. If you currently receive state or federal public assistance such as Medicaid, a life settlement can negatively impact your ability to participate in those programs.
- Transaction Costs – Commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be as high as 30 percent. Ask your broker or other financial advisor how they are being compensated and what other parties are receiving commissions.
- Privacy Concerns – When you sell your life insurance policy, you will have to authorize the release of medical and other personal information so the buyer can determine how much to offer for your policy. That information may be shared with other parties, including lenders or third party investors. Before accepting any offer from a life settlement company, make sure it has procedures in place to protect the confidentiality of your information.
Life settlements can involve virtually any type of life insurance policy. Because only variable insurance products are securities, NASD only has jurisdiction over life settlements involving variable policies. Investors with questions or complaints about a life settlement should contact their state insurance commissioner. For life settlements involving a variable life insurance policy, investors may also file a complaint with NASD.
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