New products are coming on the scene that may give life settlements of insurance policies a run for their money. “Life settlements” basically involve an investor’s purchase of a life insurance policy, or the right to receive the policy’s death benefit, from the policy’s original owner. Typically, the insured person under the policy has a remaining life expectancy of no more than ten years. Life settlements present a number of thorny issues and have been the subject of extensive regulatory and legislative consideration over the past few years (see Expect Focus, Vol. I, Winter 2008 and Vol. II., Spring 2007).
Now, some companies are beginning to offer so-called “loan settlements” as an alternative that can achieve benefits similar to life settlements, but with certain potential advantages. With a loan settlement, the policy owner receives a loan from the company offering the settlement, and the owner’s obligation to repay the loan and interest thereon is secured by the death benefit under the life insurance policy. The policy’s beneficiary, however, also retains the potential to receive a portion of the death benefit. The life insurance policy’s owner prior to the settlement remains the owner of the policy and may terminate the arrangement at any time by repaying the loan and interest.
Such loan settlement arrangements bear some similarity to traditional loans under life insurance policies, except that the companies offering the settlement will lend in excess of a policy’s cash value. State insurance regulators have had mixed reactions to recent loan settlement product filings, and the NAIC is currently examining the regulatory implications of these products. (Please see the NAIC meeting article on page 5 for more detail).