Life settlements involve the sale of either a senior’s existing life insurance policy, or a newly purchased one, to corporate investors. As the new beneficiaries, the investors make potentially large profits, particularly when the senior dies sooner than expected. The senior can profit as well, from fees paid to them upon sale to the investor (average $15,000.). The amount of these fees depends upon the senior’s age, health, and income, and although the fees are taxed as income, there are no out-of-pocket or up-front costs to the senior, who no longer pays the policy’s monthly premiums. Sounds like a win-win situation, but not necessarily.



The sale-for-fee may be a good deal for seniors when (1) the policy’s monthly premium becomes expensive; or (2) the policy’s cash surrender value has been diminished from borrowing; or when (3) the senior requires cash for retirement or other financial needs (i.e. uninsured medical costs).



But what if the monthly premium is affordable, or there has been little or no borrowing against the policy, or the senior has adequate retirement income and health insurance? And what, especially, if the senior’s children are depending on an inheritance to see them through? In these situations, sale-for-fee is not necessarily in the senior’s interest, and it may be more beneficial to maintain, or even increase, what life insurance the senior can afford.

SOLI (stranger-owned life insurance) policies sound particularly attractive, where agents offer higher fees to higher income seniors by promoting the sale of a high-benefits, tax-free policy. Here, seniors sell an existing, high-valued policy, replacing it with a new policy of lesser value, where the agent collects two commissions. The monthly premiums for a new policy, however, will usually be higher than premiums on the older policy, since the senior is now older and likely a higher risk because of diminished health. And fully half the value of a SOLI policy can be lost via the high transactions costs alone (U. of Connecticut study). Also, seniors may be encouraged to repeat these transactions every couple of years, attracted by the anticipated collection of repeated fees. But such transactions can be a set-up for fraud, where agents - whose rate of return is higher the sooner the senior dies - may fail to disclose to investors the existence of other insurance, or may inflate the value of a senior’s estate. When an agent’s interests serve to compromise the interests of the senior, financial elder abuse may be suspect (see Civil Code Sec. 3345 and Business and Professions Code Sec. 17001 et seq.; 17206/206.1).



Life settlements are being promoted as ‘free money,’ but they should only be considered by seniors who can no longer maintain their current policies. Remember, life settlements are akin to investment securities and should therefore include a prospectus of sale. Also, since the validity of a policy can be challenged, seniors should demand indemnification or ‘hold harmless’ agreements from the investors. Any life settlement offers should be reviewed by an independent advisor.



"Seniors should be wary of deals that offer them quick profits for simply allowing life insurance to be placed on their lives... It is not too difficult to envision lawsuits after the death of a senior, where the family finds out that the senior had a huge amount of life insurance, but that family members were not the beneficiaries." (Financial and Tax Fraud Associates, Inc.)



Robert Lobell

Staff Paralegal; Legal Services of Northern California

Grass Valley

On Behalf of California Agency on Ageing (Area 4).