In 1911, the United States Supreme Court ruled in Grigsby vs. Russell that insurance policies are legally viewed as financial assets which may be sold to a third party at the owner’s discretion. This court case is the foundation for the large and growing secondary market for life insurance in which policy owners can receive fair market value for their policies rather than accepting the typically lower cash surrender value offered by the issuing insurance company.
A life settlement is the sale of an existing life insurance policy to a third-party investor for more than its cash surrender value but less than its net death benefit. Life settlements are an option for policyholders who determine that their current policy is about to lapse, is underperforming, or is no longer needed due to changes in the owner’s personal or financial circumstances. Through a life settlement transaction, a policyholder can convert an unwanted life insurance policy into a lump sum cash payment. The new owner/investor buys the policy at a discount to its face value and assumes the future premium payments. The investor typically holds the policy until maturity (death of insured) at which time the investor receives the death benefit payable under the policy from the issuing insurance company.
The amount paid in a life settlement is based primarily on the life expectancy of the person insured, the face amount of the insurance policy, and its ongoing premium requirements. From the original owner’s standpoint, a life settlement typically is a more lucrative alternative to letting the life insurance policy lapse or surrendering it to the issuing insurance company, essentially turning a non-productive asset into a productive asset.
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