Life settlement transactions might not be as familiar as an option for seniors locked into life insurance policies they no longer need. Before companies such as Pacific West Capital Group existed, the choices for most seniors had been to allow the policy to lapse or accept a fraction of the policy’s face value offered by the insurance company.
Today, older Americans have a third option when it comes to their life insurance. Life settlements offer policy owners the opportunity to sell unwanted policies for two to three times the cash surrender value offered by the insurance company. Pension funds, hedge funds, brokerage firms and wealthy individual investors were the early components of the market for life settlements as investment vehicles. The sale of fractional interests in life insurance policies, such as those offered by Pacific West Capital Group, has opened the life settlements market to a wider investor-audience.
According to researchers, the life settlement market is a $20 billion industry that is expected to continue to grow to record levels over the next few years. More than 40 states now recognize and regulate life settlement transactions. One aspect of the state legislation that will help senior policy owners is the requirement for insurance company disclosure of life settlement transactions as an alternative to policy lapse or surrender.
A life settlement transaction is the sale of a life insurance policy by its owner and the transfer of the beneficiary interest in the death benefit to an investor. Unlike a viatical settlement in which a terminally ill policy owner sells a life insurance policy, life settlements transactions are based on the advanced age of the owner. This factor makes life settlement transactions a viable option to more seniors in search of a higher payment for the value of their policy.
Viatical settlements have limited investor interest because of the high risk levels associated with them. A misdiagnosis by a terminally ill policy owner’s physician or the development of a new treatment for the insured’s illness could extend the projected payout for many years beyond that the investor had originally anticipated.
Pacific West Capital Group limits the policies it selects for its investors to those where the predicted policy payout is subject to age rather than a terminal illness. Policy owners must be at least 75 years of age with degenerative or chronic health issues. While no one can predict when the insured under a life insurance policy will die, there is more of a certainty of death from old age than from a diagnosis of a terminal illness.
Life settlement investors can expect to receive a fixed return of 100 percent or higher depending upon the policy selected by the investor. Although there are no annual payments from life settlement investments, industry average annualized returns on investment are estimated at 12 to 14 percent depending upon the length of time from the initial investment until the policy payout when the policy matures.