Wall Street firms profit from life settlements as secondary market expands
Investors are increasingly purchasing life insurance policies from individuals, a practice that originated as a humanitarian aid for the terminally ill but now targets older adults seeking liquidity.
Wall Street firms and institutional investors are increasingly turning to the secondary market for life insurance, a sector known for life settlements. In these transactions, a buyer purchases a policy from the original holder, assumes responsibility for ongoing premiums, and receives the death benefit upon the policyholder’s death. This structure often means the payout goes to a financial firm or group of investors rather than the policyholder’s family.
The industry has its roots in the 1980s and 1990s, emerging as "viatical settlements" to assist individuals dying of AIDS who could no longer afford their premiums. Pioneer Scott Page started the business after a benefactor helped pay premiums for his partner’s policy in exchange for a share of the death benefit. As antiviral treatments for HIV reduced the number of terminal cases, the viatical market waned, paving the way for life settlements that target older adults who may be overinsured or struggling with premium costs.
For policyholders, a life settlement offers a third option between letting a policy lapse or surrendering it for its cash value. The buyer provides a lump sum that is typically higher than the policy’s cash-out value but lower than the full death benefit. Companies that purchase these policies generally hold them to maturity or resell them, or sell interests in bundled policies, to hedge funds and other investors.
Common reasons for selling include an inability to pay premiums, being overinsured, having no heirs, or needing funds for retirement. However, the Financial Industry Regulatory Authority (FINRA) notes that while most states regulate life settlements, not all transactions are fully regulated. Variable life insurance settlements are regulated by FINRA and the Securities and Exchange Commission, but policyholders are advised to verify a firm’s licensing status by contacting their state insurance commissioner.
FINRA also urges individuals to consult tax professionals to determine if the lump sum payment will be taxable or affect eligibility for Medicaid. Policyholders should also consider alternatives built into their policies, such as accelerated death benefits or borrowing against the policy, before deciding to sell. If using a broker to shop the policy to different buyers, it is important to check their licensing and complaint history with the state insurance commissioner.
The process requires policyholders to hand over personal and medical information so buyers can determine an offer. State insurance commissioners can advise on privacy rules and the specific regulations that apply. While life settlements can provide a necessary cash infusion, the decision requires careful consideration of all available options and the specific firm chosen for the transaction.
