What is a Life Settlement Fund?

Life insurance is one of the largest businesses in the world, and the life settlement fund is one of the latest incarnations or spinoffs of the evolving insurance industry. A life settlement fund may refer to any of a number of institutional investors who purchase life insurance policies from those who would otherwise cash them out and surrender the benefits. Universal, or "whole," life insurance policies are the ones which are sold to a life settlement fund, rather than term life insurance.

The concept of the life settlement fund originated in the United States, where universal life insurance policies are relatively common. Most of these policies, up to 90% by some estimates, never result in a claim upon the death of the insured. A lot of this is due to the fact that the insured usually has the option of taking a large cash payment while still living, rather than waiting until death for a claim to be filed by his family, but these cash payments are generally nowhere near the value of a policy. For instance, a person may have universal life insurance in the form of a policy that pays $500,000 U.S. Dollars (USD) upon the death of the individual. If he decides to take cash at some point instead of continuing to pay monthly premiums, it would not be uncommon for that amount to be much lower, perhaps somewhere in the neighborhood of $50,000 USD.

This is where the life settlement fund comes into the picture. These institutional investors will take over a person's life insurance policy, and continue paying the premiums until the individual's death. In exchange for the assignment of his death benefits to a third party, the insured receives a much larger cash payment than he would from a life insurance company. In the above example, he might receive $175,000 USD, instead of $50,000 USD.

The reasons a person may have for wanting to cash out a life insurance policy are varied, but it is clear that, in many cases, a life settlement fund could offer a lucrative deal, compared to working only with the insurance company. The fund collects the death benefits when the person dies, usually turning a profit of around 15%. It appears that all have been justly dealt with, but there are some underlying circumstances that need to be considered as well.

To start, it may be difficult for the insured person to find which life settlement fund offers the best deal. While competition has more or less an equalizing effect, information may still be hard to come by. Also, as this niche of the financial services industry grows, profitability will decrease, meaning that cash payments for policies will probably decrease over time as well. In addition, the sooner the insured person dies, the better it is financially for the settlement fund. This awkward incentive problem is enough to keep some investment firms out of the business of life settlements.