Life Settlement Contracts: Be Informed!
Life settlement contracts (“viaticals” is another term for them) are complex financial arrangements in which a life insurance policyholder sells his or her life insurance policy to a third party broker or investor. In return, the policyholder receives an immediate cash payout, the investor becomes the new policyholder, and the full death benefit is paid to the investor when the original policyholder dies. In some cases, companies provide investors with a guarantee that they will receive a return even if the original policyholder does not die during his or her projected life expectancy.
Before you invest in a life settlement, it is critical that you understand the high level of risk involved:
- A life settlement is not a liquid investment. You will have zero access to your invested principal or earned gains until after the insured person dies.
- It’s impossible for a broker to guarantee you a certain return on a life settlement because there’s no way to reliably predict an individual’s actual life span. In fact, improved medical treatments further increase the difficulty of making an accurate prediction.
- Policy premiums must continue to be paid on the policy until the insured individual dies. Before you invest, determine who will be responsible for paying these premiums, what guarantees are in place, and whether there is a possibility you’ll have to invest more money. If the premiums are prepaid, find out who will be responsible for making the premium payments if the insured person lives beyond his or her life expectancy. If policy premiums are not paid, you risk losing some, or all, of your investment.
- The life insurance policy may still be in the “contestable” period. A policy that is in the contestable period is less than two years old. Insurance companies may refuse to pay death benefits related to policies in the contestable period for various reasons.
- If the policy in question is a term life policy, an insurance company will not pay the death benefit if the insured outlives the term period of the policy.
- In the case of a group policy, the sponsoring employer or the insurance company can terminate the policy. In addition, premiums may be higher and there may be limits on the insured person’s rights to convert the group policy to an individual policy.
Questions to Ask
At some point, a broker may try to sell you a life settlement investment. Because life settlements are complicated financial arrangements that, for most investors, can be difficult to understand, it’s critical that you determine the following:
- What are the risks involved?
- Is the seller licensed to sell life settlement investments?
- Is the seller registered with the Texas State Securities Board?
- How do I know my money will actually be used to purchase the policy?
- What fees and costs, if any, am I responsible for paying?
- Will I ever be asked to pay the premiums for the insurance policy?
- Who is responsible for monitoring the status of the insurance policy and the insured?
- Has the contestable period for the life insurance policy passed?
- How is the return on my investment calculated, and what is it likely to be?
- Are the principal and return on my investment guaranteed?
- Is the firm offering the “guarantee” regulated by any federal or state agency?
- When are the principal and return on my investment to be paid?
|Due to the complex nature of life settlements, you may wish to consult a
professional, such as your accountant or an attorney, for further
guidance before making this type of investment.