Life insurance should be a liquid asset, just like your house or your car. There is roughly $20 trillion of outstanding U.S. life insurance.
Every year, U.S. policyholders waste over $100 billion as a result of lapsing policies that are unneeded or unaffordable. In fact, roughly 80 percent of all whole life insurance lapses. All of this waste translates into pure profit for the insurance companies.
Consumers need an alternative to lapsing life insurance policies. The future of life insurance is a secondary market, where policyholders can realize the cash value of their policy before maturity.
Today, this exists to a mediocre extent: It’s a small industry called life settlements. As an alternative to lapsing or surrendering a policy, life settlements give policyholders the option to sell their policy for an upfront cash payout, thereby recapturing value and turning an expense into an asset.
Today’s life settlement industry
For all the good that life settlements have to offer, the current process is ugly. The standard life settlement transaction can take months to complete and is full of long applications, repeated document signings, and long wait times.
Life settlement brokers often market their services by explaining how complicated the transaction is, creating a need for themselves to act as guides. It’s not a great experience for either the agent or the policyholder.
The current process is also opaque — designed to enrich middle men. Life settlements are traded ‘over-the-counter’ in private transactions, facilitated by brokers between the policyholder and buyers. A life settlement broker’s transactional fees can cost the seller as much as 30 percent of the life settlement proceeds.
Because the broker system is not very efficient, sellers can miss the best deals because brokers only have relationships with a limited pool of buyers. Some life settlement brokers even solicit the offers that pay themselves most handsomely, not their clients.