Life Settlement

A life settlement is an investment product which transfers the ownership of a life insurance policy from the policyholder to a third party investor known as a financing entity which purchases the policy from the policyholder. Life settlements provide a secondary market on which life insurance policyholders can sell unwanted policies to investors instead of surrendering the policy to insurance providers.

The financing entity assumes responsibility for the payment of life insurance premiums from the policyholder. The financing entity may also compensate the policyholder for existing cash value or for premiums paid by the policyholder up until the point of settlement – often at a much more favorable rate than the policyholder would obtain by surrendering the policy.

In exchange for covering premiums payments, the financing entity obtains the right to claim the benefit dictated in the life insurance when the policyholder dies or reaches a predetermined age (depending on the terms of the policy).

Because premiums must normally be paid until the death of policyholders, the cost of life settlement investments is directly related to policyholders’ lifespans. Like life insurance providers, life settlement brokers may make use of actuaries known as life expectancy providers which specialize in assessing the estimated lifespans of policyholders. The shorter the estimated lifespan of policyholders, the lower the estimated cost and the higher the estimated return on investment of a life settlement.

Example: A 75-year-old pensioner dreams of taking a world tour before passing away. While they do not have money to finance such a tour, they do hold 80,000 francs of cash value in a life insurance policy with a face value of 120,000 Swiss francs. They sell their life insurance policy to an investor for 85,000 francs in order to finance their tour. The investor then pays the premium of 4000 francs per year for 2 years, at which point the pensioner passes away and the investor collects the 120,000-franc death benefit. In this case, the investor’s profit would be 27,000 francs (CHF 120,000 - 85,000 - CHF 8000 {4000 x 2}). If the pensioner lived until the age of 80, on the other hand, the investor’s profit would be a lower 15,000 francs. If the pension only passed away at the age of 85, the investor would make a loss of 5000 francs (CHF 120,000 - CHF 85,000 - CHF 40,000 {CHF 4000 x 10}).

The majority of life settlements offered to investors in Switzerland are based on U.S. life insurance policies. In addition to direct life settlements with policyholders through life settlement brokers, investors may also invest through a number of life settlement funds.

Swiss mixed life insurance (whole life) policy holders who can no longer afford to pay their premiums can normally place their policies on hold. This provides either temporary or permanent relief from premium obligations without losses. The policy’s face value is adjusted to match premiums paid. The cash value remains intact and continues to earn interest.

Swiss policyholders who want to access capital can consider pledging their mixed life insurance policy as collateral in order to obtain a low-cost personal loan or make a down payment on a mortgage without impacting their life insurance.

More on this topic:
Life settlement investment guide
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