In the past, many media outlets have regarded life settlements as risky business ventures that gambled on the lives of the ill and the elderly. Within recent years, however, the life settlement industry has begun to bury this bad reputation by continuing to carry out its goal of providing relief to those who no longer want, need, or can afford their life insurance policies.
A surprising truth is that some independent insurance producers oppose the idea of selling a life insurance policy to an investor. Their opposition is based on a lack of knowledge of life settlements, as well as the pervasive myths that still surround the industry to a degree. Listed below are the top five myths that are circulated about life settlements — as well as the truth about each.
1. Cashing in a life insurance policy is a better option.
Before life settlements, policyholders that no longer needed — or that struggled to afford — their life insurance policy had two options: They could simply let their policy lapse, or they could trade in their policy to their life insurance provider for the cash surrender value. With the emergence of the life settlement industry, policyholders now have the option to sell their policy to a third party investor. According to the Life Insurance Settlement Association (LISA), customers who choose to surrender their insurance policy to an insurance company typically collect only 3–5 percent of the policy’s face value. In most cases, the money gained from a life settlement is significantly higher than the cash surrender value.
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2. The life insurance industry does not benefit from life settlements.
This is perhaps one of the biggest myths surrounding these two industries. Life settlements are in fact good for the life insurance industry, one of the main reasons being that, when policyholders sell their life insurance policies to investors, the investors then take over the premium payments. Once the investor takes over and starts paying the monthly premiums, insurance companies receive what is referred to as a renewal commission.