Many individuals find that the need for a life insurance policy declines as they leave the family-raising years behind or acquire other assets. In other cases, the premiums become a financial burden. So as circumstances change, some people would prefer to convert their policies to cash in their lifetimes, rather than leave the policies in force for the benefit of their estate when they die.
This can be done by surrendering the policy to the insurer for a previously agreed-upon cash surrender value. However, the cash surrender value is generally a fraction of the death benefit—for example, $225,000 on a policy that would pay $1.5 million to beneficiaries at the time of death. Clearly, the policyholder’s needs are subordinate to the interests of the insurance company.
Life settlements are a new type of transaction that brings more balance to the insurer/policyholder relationship.
What Is a Life Settlement?
In a life settlement, a policyholder receives a cash settlement payment in exchange for transferring the right to receive the policy’s death benefit to a third party (not the insurer that wrote the policy). Thereafter, the third party pays the premiums and collects the death benefit when the insured dies.
The settlement payment that an individual receives in a life settlement is typically much larger than the cash surrender value of the policy. The settlement payment is determined in part by the insured’s age and life expectancy, and also by general market factors such as interest rates.
It is important to differentiate life settlements, which are entered into with individuals expected to live at least 3-12 more years, from viatical settlements, which are entered into with individuals that are terminally ill.
Targeting the Market
The typical life settlement purveyor targets healthy, affluent seniors with large paid-up permanent life policies. A credit union version of life settlements could potentially offer a higher settlement payment or facilitate transactions for smaller policyholders that would typically be disadvantaged in the broader financial services market.
Benefits to the Credit Union
Life settlements present several opportunities for credit unions. First, they extend the financial planning and advisory services currently offered by many credit unions. Additionally, they can help credit unions grow by facilitating a transaction that generates a large lump-sum payment.
Additionally, the structure of life settlements transactions can generate attractive returns for credit unions. One potential structure is for credit unions to lend funds to policyholders to facilitate transactions. The credit union would earn a yield on the loan equal to an intermediate-term Treasury plus a spread. The loan would be fully secured by the life insurance policy, which remains in force, and the loan would be repaid via the death benefit.
Several credit unions are in discussions to develop a collaborative approach to life settlements. To learn more about life settlements and how credit unions might create a more member-friendly version, please click here and we will respond with additional information.