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Who's got next?

While many are still reeling from the credit crisis, and lack of credit there is available other are starting to figure out who is next and some are betting on the life insurance industry. When you look at the industry you see a huge mostly untapped market with plenty of people who are looking for the next deal to work on. It is almost a perfect recipe for life settlements. Individuals are reeling from the loss of equity from their home, rising unemployment, retirement accounts that are in the toilet, and baby boomers who are about to retire knowing that social security it not going to able to sustain their standard of living and looking for a way to assist in financing their golden years. Add to that investment banks that are looking for new revenue streams, stir in investors who are looking for new non-correlated investment, and hedge funds (yes they still do exist) looking for new investment to keep investors happy. Mixed all together and you get a recipe for the life settlement industry, contrary to what some believe this is not a new market it has long been the play ground of institutional and wealth individual investors.
In essence it works like this you are 68 years old and have a $1,000,000.00 you may not want, need or can no longer afford the premiums on this policy. The policy has a policy that has $200,000.00in cash value so you can take the money and walk away, but there is another option. Enter the life settlement broker this person markets your policy to different life settlement providers (those who buy policies). They will offer you upwards of double your cash value or to keep it simple $400,000.00 for the insured it’s a great deal for the , for the settlement broker, original agent who sold the policy because they continue to get residual, and the investor as long as there math is solid.
The only party that loses in this situation is the insurance company when policies lapse the insurance company gets all those premiums without actually having to pay out a death benefit, and or in the case of the insured taking the cash value then the insurance company does pay out something which can be a lot less than the death benefit. With the proposal of life settlements payout is almost guaranteed that the insurance companies will have to pay out on the death benefit.
Some insurance companies take into account that they will not have to pay out on every policy some of these consist of term policies where they believe the insured will live past the stipulated term of the policy and in other situations it is belief that a certain number of policies will lapse and/or settle for a cash value less than the death benefit. The other potential losers in this situation are potential beneficiaries. For some life insurance is the only financial comfort that loved ones have it can assist and paying for burial expenses, taking care of debt that may be left after the insured passes, and estate taxes. Before individuals start throwing their policies at anyone who will buy them they should meet with a financial advisor who can give them other potential options before they go in this direction. For individuals who may begin to see this as a way of supplementing there income or making the transition into this area should be aware that while currently there are a number of states that don’t require licensing as this product becomes more main stream and a more viable option especially with the number of retiring baby boomers the law is beginning to change. For instance in Illinois there is currently licensing, education, or registration requirement to broker theses products but that will change in June of 2010 there will be a licensing and registration requirement. This is the case in other states as well, and after the issues that investors and the other world has run into while dealing with Mortgage Backed Securities, and other derivatives I would not be surprised if there would be some potential federal regulations appearing. If the industry does not come across and road blocks in relation financing, regulatory issues, or potential securitization it may be the next major area that individuals are running to fill the gap between their income and there wants. There by creating revenue for brokers, investment banks, and investors.

Disclosure: None