Life Settlements

Life Insurance

Life insurance is a product of a special nature. Whereas individuals often invest in gifts for one another, life insurance in and of itself is a gift—not merely a product that becomes a gift through types of purchases. The purpose of life insurance is to enable individuals to provide dependents with financial protection on death. Public policies have developed to promote investment in life insurance. Tax benefits, for example, are promoted.

Insurable Interest

Traditionally, according to laws in the United States, an “insurable interest” has been considered a prerequisite for the purchase of life insurance. An insurable interest is an interest held by a beneficiary that offsets that individual's interest in the premature death of the insured, which would result in an early windfall for the beneficiary. In other words, by law, insurance is not sold to strangers, because of the risk that the beneficiary might choose to facilitate an early death in exchange for the financial benefits. It is believed that family members have a deterrent in their affection for their relatives, which is considered “insurable interest”—that is, an interest in keeping the insured alive. Insurable interest is a hedge against beneficiaries trying to cash in prematurely on the commercial value of the insurance.

Market Need

Opportunities for life settlements occur where the insured finds present-day cash more valuable than the anticipated death benefit in the future for the beneficiaries. Through a life settlement, the insured receives cash through the sale of the policy to a third party. Policies tend to include a specified cash surrender value, which represents the amount that the company will pay to buy back the policy. Life settlements are attractive because the value the insured receives through the transaction, while less than the anticipated death benefit, is more than the company's cash surrender value.

Viaticals

A distinction is usually made between a life settlement and a viatical. The latter is traditionally used to refer to financial transactions involving the sale of an insurance policy by an insured who is chronically or terminally ill. Life settlements are typically used to refer to the sale of a policy by an individual who is not ill.

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