We’ve gotten 3 calls in the last month from prospective applicants needing life insurance, required by a structured settlement buyout company. The settlor pays lump sums in exchange for pension income. All 3 have said they need a 10 year term, and knew the exact amount they needed, and needed the buyer get the collateral assignment.
Perhaps you’ve seen J.G. Wentworth commercials before where they ask you if you’re receiving a fixed income stream or annuity payout, and how if you call them, they can offer you a lump sum in exchange for your annuity. Of course I’m familiar with these settlements, but have never heard of the concept where the settlor requires life insurance on the seller.
So did a bit of digging. Naturally, my first source or research was to Google the term “Life insurance for structured settlement buyout.” I found multiple hits from multiple structured settlement companies, all basically saying the same thing… these companies will buy your pension or income stream either for life or for a period of time, but all of them that I saw require life insurance.
One site explained:
“During the pension period (the time period you sell; for instance, selling 96 $500/month payments would be an eight-year pension period) you will be required to carry a life insurance policy as collateral. If you don’t yet have life insurance, we have licensed, independent agents ready to assist you in securing coverage.”
In the frequently asked questions, you find the reason they require life insurance.
“Much as lenders require homeowner policies on mortgages, we require a life insurance policy be in place before approving a pension sale. Understandably, if the pensioner passes away all payments to us will cease; a life insurance policy helps us protect the integrity of our relationship with you.”
I was a critic when I first heard the concept, but now I’m in discovery mode. If there are any agents out there reading this article, and you have successfully placed a case for the purpose of collateral for a structured buyout, please comment and let me know if the carrier had any questions about the purpose of insurance or establishing an insurable interest.
I also interviewed a gentleman at the Lump Sum Settlement Store (link below), who said this is a new industry that just popped up 2 years ago when the Pension Protection Act was changed, and now tens of thousands of these deals are being done per year. So it seems it could be legit.
Below I’ll list the webpage I quoted above.
http://lumpsumsettlementstore.com/?page_id=45
{ 4 comments… read them below or add one }
Chris –
Excellent post, sir! I’m Nick Perry, the proprietor at the LumpSumSettlementStore.com. I wanted to add one thing if I may – you’re absolutely right that carriers will sometimes have questions about cases such as this. If you’re an agent looking to write this sort of business, it’s very important to discuss it with your carriers first. Some are very open to this type of business and welcome it. Others aren’t willing to write the policies at all, simply because the lapse rates are so low. As you know, life insurance companies thrive on lapses – if a carrier feels that their risk tolerance is already hitting the edges of their comfort zone, they will typically be much less willing to consider this type of business.
In short: if you’re an agent interested in writing this business, call the carrier you plan to work with first and describe the process in detail. In the same way that some carriers will take diabetics while others won’t, some carriers will look more favorably on this class of business than others.
I hope this helps! Again, Chris – excellent post!
Thanks so much, Nick. Not sure I’ll be targeting this market.
Hey Chris – I have a settlement broker sending me referrals and I’ve placed dozens of these cases successfully, but had a few bumps in the beginning.
Carriers aren’t too sure about this business. I can tell you that several carriers including Genworth, American General and Assurity will refuse the business.
When you do get an approval, it needs to fall within guidelines of the investors. The total premiums for however many years they are selling their income stream can’t exceed a certain percentage of the purchase price. So AOTA’s and impaired risk cases may not qualify even if they do get an offer.
Also, just because you get someone approved with collateral assignment completed, doesn’t mean they’ll get their lump sum payout. Investors jump all over the government pension streams, but are balking on private pensions right now. You will get some lapses.
Thanks, Jeff. That was a very useful comment.