Buying Life Insurance for Life Settlement Purposes

A life settlement occurs when some sells their unwanted or unneeded life insurance policy for an immediate payment. What happens when the life insurance policy was unwanted or unneeded to begin with? By now, most are familiar with STOLI transactions which have come under immense public, regulatory and statutory scrutiny. However, policy flipping in which someone with an insurable interest buys unneeded life insurance for themselves or loved ones with the intent of selling it in a life settlement has garnered much less attention. Although these are not expressly prohibited by state laws in the same manner as STOLI’s, they are not a wise investment nonetheless.

Every life settlement broker and life settlement provider are seeing a number of people attempting to sell policies they purchased with an insurable interest 2 – 4 years ago, but always intended to flip in a life settlement. The reality of today’s market isn’t in line with the windfall they expected when originally purchasing the policy. The life settlement environment has changed dramatically in just a short amount of time. Less regulation, overzealous and less sophisticated buyers, combined with a higher level of buying competition drove policy valuations up in the past. Now the industry takes a much more conservative approach when pricing settlement offers. In part because fewer buyers are active and they are now dictating higher IRR’s. Mortality tables have also changed to reflect longer life expectancies and buyers demand older insureds as a result. In addition, some of the tools used by policy flippers to acquire policies, such as premium financing, are now receiving steep discounts on the secondary market. Some states have changed the playing field by mandating a minimum length of time a policy must be held before being sold. Consequently, many people who bought insurance with the intent to sell now can’t find settlement amounts high enough to recoup the money they’ve paid into the policies. In some cases, sellers can’t find any buyers willing to even make an offer.

Those that bought policies with the sole intent of selling them are learning the hard way that life insurance is not an investment. Many policy flippers find themselves upside in a policy, similar to the way others may be paying more into a mortgage than a house is actually worth. The simple lesson is, if you don’t need life insurance for insurance purposes don’t buy it. You just might end up with insurance you don’t want or need. There are much better investments available, especially now. Although, if someone ends up with a policy that has outlived it usefulness they should by all means consider a life settlement. The key is to remember that life insurance is supposed to be useful at some point.