For some facing short life expectancies, selling life insurance policies may offer big benefits.

It may seem controversial or even ghoulish, but under certain circumstances a life settlement may benefit one of your clients. In a life settlement, an insured person, often a senior citizen, sells his or her life insurance policy for a lump sum that exceeds, in multiples, the cash surrender value (if any) offered by the insurance company.
A new study by Sanford C. Bernstein & Co. says the industry has the potential to expand by tens of billions of dollars over the next decade. But the concept is controversial, and has its fair share of critics. The biggest losers in life settlements cases are insurance companies, which would rather maintain the status quo.
Life settlements are a little-known, growing investment area with potential opportunities for financial advisors, particularly those with older or very wealthy clients with shortened life expectancies. Returns to investors are above average, sometimes reaching 12% or more. Commissions to financial advisors, brokers and independent agents with a life insurance license generally range from 4% to 6% of the amount paid for the settlement. If a fee-only financial advisor brings the deal to the life settlements company, he or she typically receives 4% to 6% of the settlement proceeds. If two people are involved, say a broker and advisor, they often split the amount. Othertimes, fee-only advisors simply charge hourly fees and monitor the broker.
The proceeds paid to a senior who sells his or her policy, rather than letting it lapse or settle for the surrender value, may be used to make other investments or purchase long-term-care insurance, annuities or other products. "Life settlements add options to insureds that haven't been readily available until recent years," says C. Zach Ivey, CFP, ChFC, CLU, in Mountain Brook, Ala. "It's something I look at every time a client fits the parameters." 
Life settlements are considered a viable option when the policy may no longer be needed because the insured's family is grown and established and no longer needs income protection, or the premiums are too high and the insured can use the proceeds to invest in something that offers a return, or because estate tax protection is less critical. Most policies are of the permanent type, while settlements of renewable and convertible term policies are possible.
The transaction is handled through a life settlement provider, who in turn bundles and securitizes the policies, which are predominantly purchased by institutional investors who expect a good return when the insured passes away. Involvement by other purchasers is on the rise, such as individual investors and, increasingly, subsidiaries of insurance companies. Several reinsurers are buyers as well.
Life settlements should not be confused or lumped with other classes of settlements where a person sells at a discount an asset with a future or protracted payout, such as lottery winnings, settlements of major lawsuits and reverse mortgages. Nor should they be confused with viatical settlements, which refer to the sale (not purchase) of policies by terminally ill insureds to settlement companies and which gained notoriety in the 1990s as most were AIDS cases and some companies were perceived as preying on sick people. Viatical settlements are structured different than life settlements. A viatical settlement typically involves a comprehensive medical examination upon which the proceeds and the deal itself are contingent. In a life settlement transaction the insured fills out a questionnaire similar to that used by insurance companies, and actuarial tables are used to determine the settlement sum.
If a life settlement is being considered, it's wise to shop among various providers. The same holds true if you seek the assistance of a broker or independent agent with ties to different settlement firms and insurance companies. 
Whether the sale or retention of a life insurance policy is a better option requires analysis typically utilizing actuarial tables, morbidity statistics and the answers to a medical questionnaire from the provider. The longer the expected remaining life, the smaller the proceeds will be, for obvious reasons. Someone expected to live ten or more years, for example, would get more than someone with a 15-year expectancy, even if both have the same face-value policy. The fewer the number of years the person lives after his policy is sold, the greater the settlement firm's return.
Advisor Ivey says that while "life settlements may not always be the best solution, it's always important to consider them. I think an advisor incurs a liability if they are contemplating surrender of a policy without considering the secondary market for a life insurance policy."
One example he gives is that of a 72-year-old widow who had in force a survivorship policy her husband had bought in the late 1980s. Due to the decline in interest rates, the policy values were not as projected. In early 2005, he says, she started getting notices that her premiums were going to skyrocket in order to maintain the coverage. She was unable to pay the increased premiums. Her surrender values were low compared with the death benefit. "The life settlement was the perfect solution for her, and completely unknown," says Ivey. "We advised her to sell the policy, and the settlement was two-and-a-half times her surrender value."
Likewise, John K. Bacci, a CFP and ChFC in Linthicum, Md., says he has used life settlements successfully. One recent case involved a 65-year-old divorcee who was owner of a cash value life policy on her husband. The gross cash value was $22,000 and the net value about $7,000. The death benefit was $150,000, and the policy premium about $7,000 per year. "The individual was not able to maintain the policy," recounts Bacci. "Her husband, age 71, had significant but not immediately life threatening illnesses. Rather than walk away from the policy and receive $7,000, or let it lapse from lack of premium in a year or two, the client 'sold' the policy for $14,000. The insured is still alive. In this case, the ex-wife would have had no better option than to settle the policy."

The typical market for life settlements is affluent seniors 65 or older, with actuarial life expectancies of four to ten years and policies of $500,000 and up (though they can be lower).
The current market of $13 billion is expected to skyrocket to $160 billion over the next decade, according to the Sanford C. Bernstein study. There currently are $9 trillion of traditional life policies on the books of insurers, the study notes, so growth could expand easily.
It likely will cause reform within the life insurance industry, making new policies' surrender values more competitive. Another factor favoring expansion are the now-retiring baby boomers, increased longevity and an increasingly wealthier population. In Europe, purchases of life settlements by investors is commonplace, dating back five or six years.
Currently, the providers of life settlements are few, but include some big names: Coventry First, a subsidiary of Warren Buffett's Berkshire Hathaway; American International Group (AIG), which carries at least $3 billion of purchased policies on its books; ING, Credit Suisse, Old Mutual and Wells Fargo. Life Partners Inc., the largest independent player, recently closed a deal with a major capital firm that will enable LPI to make direct purchases of policies in addition to retaining its provider role. Two other independents are Peachtree Funding in Atlanta and Maple Life Financial in Bethesda, Md.
So if life settlements are that good and expected to enjoy explosive growth over the next ten years, why do so few advisors and other financial professionals know much about or engage in the transaction? One reason: This so-called "transfer of value" sales option of the policy asset, which creates a secondary market for the policy, is neither well known nor broadly marketed. "I didn't even know the product existed until recently, and I've had an insurance license over 30 years," remarks Tim Harper, an independent insurance agent and financial advisor in Grapevine, Texas.
A second reason may be that life settlements are an outgrowth of the once-controversial viatical settlements industry, which subsequently incurred a shakeout and consolidation amidst increasing regulation. Brian Pardo, CEO of Life Partners, which survived the shakeout and helped pioneer the life settlements field in the late 1990s, says the life settlements field has now surpassed the viatical segment in volume and potential.
"Life settlements are now much less controversial, regulated by at least 30 states, and involve bigger players," he says." Instead of a market composed of the financially stressed terminally ill, life settlements involve well-heeled, healthy seniors."
Pardo contends the main reason so many are in the dark is that career agents of major life insurance companies are contractually prohibited from participating in life settlements, and consequently many insurance owners don't realize they have the option to sell their policy.
Some insurance experts, however, point out the downsides of the concept. Peter Katt, a fee-only life insurance advisor, who has written extensively on the subject ( and advises insured policyholders, warns against what he views as some of the risks in life settlements. "I have no problem with clients in the right circumstances using the secondary market to sell a policy," Katt says. "But life settlement firms aren't satisfied with simply providing a secondary market to purchase existing policies. Instead, they have formed alliances with financing firms to work with agents to identify wealthy persons to become insureds for policies whose sole purpose is to create larger inventories for life settlement purchases. (This has become known as 'stranger life insurance' or SOLI.)
"These deals," in the opinion of Katt, "suppose that all parties will profit at the expense of life insurance companies, who it is thought don't know how to properly price their policies. This is nonsense, and there are going to be many slick operators in this field that are going to get burned."
And for some, life settlements raise ghosts from the past. "People are vulnerable when they're looking for lump-sum cash," maintains Robert S. Thompson, president of Sage Financial Design Inc., a fee-only planner in Simsbury, Conn., who says he is mostly against life settlements. "AIDS and viaticals involved people who were terminally ill and needed cash to pay for their experimental drugs, which incurred horrendous costs." Thompson contends the system is mostly stacked against policy sellers.
Despite the potential for abuse, life settlements is a growing industry and may be a viable option for insured seniors and advisors alike-under the right circumstances.

Bruce W. Fraser, principal of Bruce W. Fraser Communications, an editorial services firm in New York, has written for many publications. He can be reached at [email protected]. Visit him at