The Value of Life Settlements
A life settlement is simply the sale of an existing life insurance policy by a terminally ill or elderly person to anohter party. The price of the policy is negotiated and sold by the owner at a discount to the face amount. The purchaser then collects the full amount of the policy when the insured person is deceased.
Life settlements are similar in nature to a zero-coupon bond. Policies are purchased at a discount to their face value. These discounts fall into general brackets according to the life expectancy of the insured, but will vary slightly based on invidual policy features and market conditions for the policy.
Yield is computed from the difference between the cost basis (including any premiums paid) and the amount paid out under the policy upon the demise of the insured. An annualized return on investment may be derived from this yield by adjusting it for the holding period of the investment.
The acquistion cost includes all fees and costs associated with the transaction as well as an amount for the payment of premiums during the maximum life expectancy of the insured. In the event the escrow is depleted before the demise of the insured, the purchaser is responsible for replenishing the account to the extent of the owner's interest in the policy.
All transactions are regulated by the Texas Department of Insurance and are closed through an independent trust company regulated by the Texas Department of Banking.
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