Disadvantages with life settlements
Although the Life settlement is a good option for the senior citizens who want to sell their life insurance policies to the investors to get to collect the money before their death yet Life Settlements involve a number of risks both of the policy holders and the investors. There are significant risks associated with the life settlements that must be posed before entering into the final decision. The major benefit of the life settlement is to enhance the value and the liquidity of the life insurance policy of the policy holder however many of them are victimized by the fraud and forged life settlement companies. The effective regulation of the life settlements involves efforts from both the securities and insurance legislation.
Who are the losers of life settlements? Insurers or the policy holders
Life settlements are beneficial for those senior citizens which do not have beneficiaries or heirs at their side. If a person has heirs and he wants to benefit them with his life insurance policy after his death then it’s not a good idea to have a life settlement. Some of the citizens are not senior enough to have a life settlement but they owe large life insurances and are unable to pay the premiums so they try to manage life settlements with slick-sounding deals.
In life settlements insurance companies are also looser to some extent as in life settlements there is no “lapse” of the life insurance policies of the citizens. If there is no lapse the insurance company is in loss as in the case of lapse company gets premiums from the policy holders for years but never pay the death benefits to the policy holders.
The Insurable Interest Problem
This problem arises when the senior citizens try to repeat the process of life settlement every two years. People keep on buying a number of life insurance policies and suddenly they are found dead. The insurable interest increases with the wealth of the person however it still remains finite. The concept of the insurable interest is that a person having wealth of $15,000 can not buy an insurance policy of $50 million. However in many of the life settlements deals the portion of the money received is used to buy a new insurance policy and hence the cycle goes on resulting in the creation of Insurable Interest problem.
Rebate to encourage policyholders to sell
In order to get a wealthy old citizen into the complex transaction of the life settlement agents use rebates as bait. They attract them by paying them $500, 00 on a ten million dollar policy just by filling up one or two forms. This money comes from the commissions paid on the sold life insurance policy of that wealth citizen and is called rebate of commissions. This process of rebating is illegal agent and in various states security regulators are looking in the matter of rebating to ensure secure transactions of the life settlements.