What Is the Secondary Market for Life Insurance Policies?
The secondary market for life insurance policies makes it possible for people who need to quickly create liquidity to cover expenses to sell a life insurance policy for cash. Unfortunately, even those who sell life insurance may not be aware of its existence, and far too many financial advisors don't realize its potential. Read on to get the facts about the secondary life insurance market.
Primary vs. Secondary Market for Life Insurance Policies
In the life insurance industry, the primary market is between insurance companies and individuals who want to purchase policies. Consumers compare policies and insurance providers and choose one that fits their needs.
In the secondary life insurance market, the consumer who holds the policy becomes the seller. Buyers make offers to purchase the insurance policy, and the policyholder receives a cash payment for the agreed-upon selling price.
Viatical Settlements vs. Life Settlements in the Secondary Market
There are two types of transactions in the secondary life insurance market:
• Viatical settlements: When someone who is terminally ill sells their life insurance policy to a third party to get money to cover the cost of their care
• Life settlements: When an older adult who is not terminally ill sells their life insurance policy to get access to cash to settle debts, cover expenses, or invest elsewhere
Benefits of Selling a Life Insurance Policy
For the insured, selling a life insurance policy can have many benefits, including:
• More return on initial investment: Most policies that can be sold on the secondary market have a cash surrender value, an amount that a policyholder can get from the insurance company if they wish to terminate their policy. Usually, this amount is equal to the cash value of the life insurance policy minus fees. Because these fees are often costly, the insured can often get more money from a life settlement than they can by surrendering their policy.
• Stoppage of premiums: Seniors who can no longer afford their life insurance premiums may risk the cancellation of their policy. A life settlement can put an end to premiums while allowing older adults facing financial hardship to gain access to cash that they can use to cover their living expenses or long-term care needs.
• Making the most of an investment that is no longer needed: Typically, older individuals do not need as much life insurance. They are less likely to have mortgage payments to consider, and their adult children may not depend on them financially. Those who purchased extensive whole-life policies to protect their loved ones when they were younger may no longer require a sizable death benefit. Life settlements allow them to cash out those large policies. Guaranteed acceptance, life insurance, and burial insurance can replace previous policies and provide enough money for final expenses.
Who Will Buy a Life Insurance Policy on the Secondary Market?
Even financial professionals who are aware of the secondary life insurance market may not be sure exactly how to proceed if their clients would benefit from selling their life insurance. One option is to sell a life insurance policy to one of the many life settlement companies whose sole business function is buying policies on the secondary market. If you go this route, the best option is to solicit quotes from multiple companies. You are likely to find that the amount offered for life settlements and viatical settlements varies dramatically. Getting numerous quotes can help to ensure that your clients receive a fair price.
Another option is to work through a life settlement broker who will solicit offers from multiple life settlement companies and then present them to you for comparison. In most cases, brokers receive payment from life settlement companies, so fees for their services are unlikely.
How Do You Determine the Market Value of Life Insurance
The market value of life insurance depends on the cash value built up in the policy and other factors. Because pricing can vary widely, it is a good idea to have a life insurance policy appraised before trying to sell it on the secondary market. A knowledgeable life insurance policy appraiser has the necessary knowledge of market trends and conditions and can use it to assign a fair value to a policy. Ordering an appraisal is the best way to get a feel for the value of a policy, so you can rule out offers well below market value and get leverage during the sales negotiation process.