Negative life settlement stories focus on the rare greed of a few individuals or firms. They do not accurately reflect all of the good that comes when the elderly transfer life insurance ownership to brokers or investors. The facts below show that all parties benefit from a well-structured life insurance settlement.

Seniors Get Retirement Cash

A long-range estate-planning tool like life insurance can quickly become outdated. Financial needs change from year to year, especially when a spouse gets sick or children grow up to do well on their own. A policy that made sense 30 years ago may now just be sucking funds away from more important activities.

Life settlements give older adults the opportunity to dispose of insurance policies that they no longer need or can no longer afford to maintain. They can use the lump-sum settlement for any purpose, including long-term care costs, daily living expenses, travel and general spending. Instead of giving the policy back to the insurer for pennies on the dollar, seniors can get up to eight times more money through the settlement process. They also escape the hefty premiums, which can drain thousands out of a bank account each year.

Investors Get Stable Returns

Without the chance to make a profit, investors would never be willing to pay seniors more than the cash value of a policy. Investors find life insurance settlements so attractive because they supply exceptional returns for only a moderate amount of risk. With an outlay of as little as $20,000, qualified investors can double their money within a 10- to 15-year timespan. They can see estimated annual returns of eight to 10 percent or more after fees. Institutional and independent investors like the low-risk exposure. Life settlement proceeds do not rise and fall based on the whims of political powers, stock markets, interest rates or foreign unrest.

Brokers Get Intermediary Fees

Settlement brokers take commissions for connecting policy sellers with investment buyers. These brokers are not just middlemen, however. They invest in technologies that improve actuarial analysis and communication flows. Many also take over the paying of premiums until a policy has matured. Life settlement brokers gain long-term relationships with clients at the selling and buying ends of the spectrum.

Insurers Get Continuous Premiums

Under a life settlement, insurance companies continue to collect premiums until the insured passes away. This timeline provides up to 20 years of extra revenue that the insurer would not otherwise receive. If the owner had simply allowed the policy to lapse, the insurer would have been left with no incoming cash flow. At the same time, a surrender would actually have caused the insurer to owe money.

Even though each life settlement deal has different characteristics, the transaction always ends with four satisfied parties. So who benefits from a life insurance settlement? Everyone does.

Life Settlement Brokers Share High-Return Investments

Even though life insurance settlements have been around for more than 20 years, they have only recently received exposure to the general public. Now independent, qualified investors can see returns that had once been the bread-and-butter of investment banks and institutional funds. The rapid growth in the industry means that more opportunities can be expected over the next decade.

Basics of Life Settlement Transactions

The basic life settlement agreement involves five parties: the insurance company, the policy owner, the insured, the settlement broker and the investor. Here’s how the process works:

1. The policy owner sells the contract ownership and beneficiary rights to a brokerage company.
2. The broker sells shares of one or more policies to institutional and independent investors.
3. The broker or the investor continues to pay life insurance premiums, depending on how the deal has been structured.
4. The insured, who may also be the previous policy owner, passes away.
5. The insurance company pays the face value to the broker as beneficiary.
    
6. The life settlement broker pays investors based on their fractional beneficial interests in the policy.

Settlement deals are relatively easy to set up, but they require a long-term investment horizon. Life settlements typically reach maturity within 10 to 15 years, although the payoff may come much sooner or much later.

Benefits of Senior Settlement Investments

Life settlements, or senior settlements, offer substantial benefits for the right investor. These include:

Fixed Returns

Life insurance settlements supply a fixed payout based on the policy's face value. Because they carry higher risks than bonds or fixed income accounts, the anticipated annual rate of return is also higher. Investors often see capital growth rates of five to 10 percent after fees. If the investment reaches maturity sooner than expected, rates can top 18 percent or more.

Diversified Assets

Settlement agreements are particularly attractive because they operate independently of stock exchanges, interest rates and currency valuations. They provide an excellent opportunity to diversify a portfolio and still earn reasonable returns.

Limited Risks

Experienced life settlement brokers take steps to reduce or eliminate the most common investor risks. Some of the preventative actions taken in each area include:

• Political whims: Life settlement agreements have been regulated in 90 percent of markets throughout the United States. The contracts typically fall under the purview of the state's securities board or banking division. Legislative protections have been passed in 42 states and Puerto Rico.

• Insurer collapse: Brokers can choose to select only policies that have been backed by a financially stable, top-rated insurer.

• Policy lapse: Proven underwriting standards ensure that premiums are paid for the life of the insured.

• Longevity: Advanced actuarial models have improved the life settlement industry's ability to predict how long a person with certain characteristics will live. At the same time, this number can never be guaranteed.

• Contestability: Before policies can be purchased, they must be in force for a minimum of two years. This waiting period staves off stranger-originated life insurance transactions, suicide clauses and material misrepresentation clauses. In addition, many brokers ask heirs to acknowledge the transaction and relinquish their rights to challenge after death.

Nearly $35 billion worth of life settlement contracts are still outstanding, and more are being written each day. For people who understand the basics of these transactions and are willing to assume the risks, the future upside can be substantial. A qualified life insurance settlement broker can sit down with potential investors and discuss the newest opportunities.

LISA Plans for Another 20 Years in Life Settlement Industry

The world's largest life settlement trade organization is celebrating a monumental anniversary. The Life Insurance Settlement Association's 20th Annual Spring Life Settlement Conference will combine a look back at the industry's rich past with innovative perspectives on the future. Even though LISA has been around for two decades, life settlements have a much longer history. Speakers will address hot-button issues, including the topics below.

Customers and Policies

The first life settlements occurred in the late 1980s as a type of cash advance for terminally ill AIDS patients. Over the next decade, settlements began to include seniors who were not necessarily terminally ill but did suffer from serious diseases. The face value of the average policy had been $2.2 million. Today's life insurance settlements also focus on elderly adults with chronic or debilitating illnesses. While settlement companies have traditionally shunned policies worth less than $500,000, advances in actuarial modeling have made even $100,000 policies more desirable.

Regulations and Oversight

The senior settlement industry was once known as the "Wild West" due to the lack of sufficient regulatory control at the time. Some states oversaw settlement transactions as securities while others lumped them into the same category as life insurance. Unscrupulous brokers gave seniors cash or gifts to set up insurance contracts. Some so-called brokers even trapped seniors in unethical financing deals so they would have no choice but to sell their new policies.

Today, 42 states plus Puerto Rico have helped to kick out the con artists and transform the life settlement industry into a regulated environment. Stranger Owned Life Insurance, or STOLI, transactions have been outlawed. New developments continue to come out of the National Conference of Insurance Legislators, the National Association of Insurance Commissioners and other organizations. Seniors, investors and life settlement companies have all gained peace of mind. All parties can make informed decisions without worrying about rampant fraud or deception.

Opportunities and Growth

LISA members continue to see exciting developments in viatical and non-viatical life settlements:

• Texas has become the first state to legislate Medicaid life settlements. Older adults can sell their life policies for more than the surrender value, keep the proceeds in a healthcare trust and still be treated as private payers with regard to long-term care expenses. New York, New Jersey and Florida are considering similar laws.

• Actuarial Standards of Practice Number 48 lends consistency to life settlement mortality calculations. The guideline helps to define actual-to-expected death ratios across different categories and time periods.

• Hybrid insurance contracts, unsecured loans and long-term care benefit riders may help more people keep their policies, but they also provide opportunities for innovation in the settlement industry.

• Public education campaigns, industry collaboration and better customer relationships may provide the keys to increasing awareness about life insurance settlement options.

As always, LISA's Spring Life Settlement Conference will be fun and informative. Guests can take advantage of meet-and-greets and cocktail receptions to make new acquaintances and strengthen old relationships. This year's keynote speaker will be Senator Bob Casey of Pennsylvania, a strong advocate of fair life settlement legislation at the federal level. The 2014 conference will be held April 30 through May 2 at the Marriott Wardman Park in Washington, D.C.