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Selling yourself short? The other side of Life Settlements.
Tuesday January 15, 2008 12:00AM | Click here to visit original article.
BOSTON (MarketWatch) -- Everyone could use a little more money, but needing that cash desperately and in a hurry leads consumers to make a lot of mistakes. While the typical mistakes involve payday-advance loans or tax-refund anticipation loans, one big concern for senior citizens in need of cash is the "life settlement." Life settlements aren't a particularly well-known part of the financial landscape, but they are becoming increasingly popular -- and increasingly dangerous. To that end, NASD last week issued an "investor alert" to warn seniors about the potential dangers involved in selling an existing life insurance policy for cash. It's a warning that consumers should heed, particularly if they know seniors who have cash-flow worries. Life settlements -- sometimes called "senior settlements" -- are a logical extension of a product that became popular in the 1990s, the "viatical settlement." In a viatical deal, people giving up insurance policies typically are ill and have a short life expectancy; they're taking a lump sum now and giving up their insurance coverage because their life is likely to end within two years and they need the cash to ease the time they've got. Life settlements are similar in how they operate, but they are targeted at folks who are not terminally ill, just old enough so that their life expectancy generally would fall in the two- to 10-year range. The life-settlement provider may hold the policy it buys until maturity (the death of the seller of the policy) or it may sell part or all of the policy to other investors, as varied as hedge funds and other insurance companies. The consumer's lump-sum payment depends on a number of factors, including age, health and the terms of the insurance policy being sold. And premiums needed to keep the policy in effect are paid by the purchaser, who gets the death benefit in the end. "For some seniors, there are not a lot of places to turn if they need cash," says Ed Long, executive director of Healthcare and Elder Law Programs Corp., which runs the help4srs.org Web site. "But this is an idea that is sold to somebody, not something they tend to come up with on their own, and the real juice here is for the people buying the policy, not the person selling it." Getting the cash now, instead of leaving it to your estate, is not always a bad idea, particularly if you have a strong need for the money. But NASD officials point out that, even for people who perceive a need, the life settlement works for just a small percentage of the population. "It might work if you have an immediate need for cash, if you are getting more from the settlement than you'd get in the policy's surrender value, if you can't borrow against the policy you are selling, you haven't got other sources of cash, and you've got a hard-core need for the money right now," says Elissa Walter, senior executive vice president for NASD. "It's being sold to a lot of people who don't really fit that kind of description." Huge market potential Most industry data estimates the market for life settlements in the $5 billion to $6 billion range, but some studies -- and a number of firms that have gotten into the business -- suggest that the potential market could be 20 times larger. NASD, which normally regulates securities brokers and dealers, seldom gives insurance advice, since most forms of insurance technically don't qualify as "investments." Life settlements can be made on virtually every form of insurance, although only variable insurance products fall into the realm of securities. The agency steps across the securities boundary and into areas like insurance only when it sees a problem brewing. Says Walter: "The thorniest issues in the financial world today are the ones on the cusp, the edge between securities products and other products, in part because people aren't sure of where to turn for help." The issues that the NASD wanted to provide help with are at the core of the life-settlement decision. They include:
Says Walter: "The biggest problem for most people is that they don't have enough information to know if they are making the best decision. They need to look at their options, both in the form of getting several offers for their policy, and in thinking about everything they might do besides selling the policy. ... They may have a current need for money, but they shouldn't be rushing into this, because it will affect them for the rest of their life." Source--- Selling yourself short http://www.marketwatch.com/news/story/life-settlements-satisfy-need-cash/story.aspx?guid={981163A7-27E4-4175-91BF-2E69084FD713} |
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