Many life insurance policyholders are unaware that their policies might hold significant value on the secondary market, where life settlements and viatical settlements take place. These transactions involve selling life insurance policies to third-party investors, potentially providing substantial financial benefits. As a fiduciary advisor, understanding and guiding your clients through the options available on the secondary market can significantly enhance their financial strategies.
Understanding the Secondary Market for Life Insurance
The secondary market facilitates the sale of existing life insurance policies that are still in force. There are two main types of transactions in this market: life settlements and viatical settlements. Life settlements cater to policyholders over the age of 65 who are not terminally ill, whereas viatical settlements are designed for terminally ill policyholders.
This market was legitimized by the 1911 Supreme Court case of Grigsby v. Russell, which affirmed the legal right to sell one’s life insurance policy. The development of this market accelerated during the 1980s AIDS epidemic when terminally ill patients began selling their policies to manage treatment costs. This historical context set the stage for the modern secondary market, which now serves a broader demographic.
Primary vs. Secondary Life Insurance Markets
The primary life insurance market involves the initial sale of life insurance policies directly from insurance companies to consumers. Here, policies are issued, and the relationship is directly between the policyholder (who is often the insured) and the insurer. An insurable interest must exist, meaning the policyholder would face financial loss upon the death of the insured.
Conversely, in the secondary market, the transaction involves the sale of the policy from the original policyholder to an investor. The investor does not need an insurable interest in the insured. Upon the death of the insured, the death benefit goes to the investor.
How the Secondary Market Operates
In the secondary market, policyholders can liquidate their life insurance, often receiving far more than the policy’s cash surrender value. This process involves either direct sale to a buyer or through a broker who can facilitate competitive bidding to maximize the sale price.
The choice of broker is critical; a well-connected broker can manage negotiations effectively, potentially securing a higher sale price than multiple brokers working simultaneously due to better oversight of the bidding process.
Benefits of Selling Life Insurance on the Secondary Market
Selling a life insurance policy on the secondary market can be highly advantageous for clients who no longer need or want their existing coverage. The benefits include:
- Significant Cash Payment: Selling a policy on the secondary market can yield a substantial cash sum, often much higher than the surrender value offered by insurance companies. This payout provides financial flexibility for other needs or investments.
- Elimination of Premium Payments: After the sale, the new policy owner assumes responsibility for all future premium payments, relieving your client of this financial burden.
- Adaptability to Changing Financial Circumstances: Life insurance is typically a long-term commitment. However, a policy purchased decades ago may no longer align with current financial needs. Selling the policy can free up capital to invest in more suitable assets or financial products.
Guiding Your Clients
As a fiduciary, your role isn’t to be an expert in life settlements but to be knowledgeable enough to advise your clients about their options. Partnering with a company like Harbor Life Settlements can provide you with the support needed to offer your clients informed advice and facilitate the sale of their policies. Harbor Life can help estimate the value of a policy on the secondary market and guide the client through the sale process, ensuring they receive the best possible outcome.
By integrating knowledge of the secondary market into your advisory services, you can help close the knowledge gap many policyholders face and guide them toward making decisions that enhance their financial wellbeing.
