In 1911, the United States Supreme court established legal property ownership rights for life insurance. This paved the way for policy owners to sell their life insurance policy to a third party as a legal practice. This concept gained popularity as a financial solution to help patients struggling with the high costs of AIDS treatments in the 1980s and 1990s. From there, viaticals evolved into life settlements as models projecting mortality over a longer timeframe. The process became more reliable, which created interest from institutional investors.
The life settlement market took off in the 2000s as more investors saw the viability of this asset class, and consumer awareness grew from increased marketing and advisor participation. Billions of dollars of death benefits were purchased from policy owners discovering that they had a secondary market outlet for a policy that they may otherwise lapse or surrender. During this time, regulators worked with the industry to develop and implement regulations to create a level market with ample consumer protections that are now in place in 45 states covering 90% of the U.S. population. Today’s life settlement environment has become mainstream, with numerous options for policy owners and agents to access the secondary market value of their life insurance and turn an unneeded death benefit into a “living benefit.”
Today’s secondary market provides policy owners with access to a variety of solutions tailor-made to address their unique financial needs. These options include:
- Instead of abandoning a policy after years of premium payments, the policy owner can use this illiquid asset to create a lifetime income stream by exchanging the policy for an annuity.
- The owner could also address the expensive costs of long-term care by exchanging the policy for a tax-advantaged Long-Term Care Benefit Account.
- The policy owner could also elect to keep a reduced paid-up death benefit by exchanging the policy for a Retained Death Benefit without being responsible for any future premium payments.
- In addition, the owner could elect to take a lump-sum cash payment in exchange for their policy that on average could be 7-10 times greater than any remaining cash surrender value.
Nine out of ten life insurance policies will be abandoned before paying out a death benefit. With over $185 billion of death benefit owned by seniors on an annual basis that could potentially qualify to exchange their policy for “aftermarket” living benefits, legislators are responding to help. Legislators now understand the important role the secondary market can play in solving many of the financial challenges afflicting seniors and their families who failed to adequately plan for the costs of retirement, or unexpected costs created by health and long-term care related expenses. A number of favorable state and federal legislative and regulatory developments have occurred propelling the significance of a healthy secondary market. National organizations are also recognizing the benefits of a policy exchange on the secondary market.
On July 19, 2017, the National Association of Insurance Commissioners released the policy paper Private Market Options for Financing Long-Term Care endorsing the life insurance secondary market as a viable option to help people pay for long-term care. In it, the NAIC also points out the disparity between the cash surrender value of a life policy and its much higher secondary market value. This policy paper by the regulatory body for Insurance Commissioners that govern the insurance industry is an important step forward towards increasing the awareness of exchanging a life insurance policy for people looking for ways to pay for the expensive costs of long-term care.