Buried Alive: The Risks of Buying Someone Else’s Life-Insurance Policy

The Wall Street Journal recently published an article  regarding the pros and cons of buying someone else’s life-insurance policy. Often referred to as “Life Settlements,” a buyer purchases someone else’s life-insurance policy for a fraction of its face value. When the seller (insured) dies, the buyer collects the benefit. This highly controversial process has many risks that should be considered. First, from a tax perspective, the death benefits received by the investor are treated as ordinary income. The ordinary income rate is much higher than the rate for capital gains from securities or real estate. Second, fraud is problematic for these devises because investors cannot verify assertions made about the policyholders health by doctors and actuaries. Finally, there is a risk that if the seller lives longer than was initially projected, the buyer is required to continue paying premiums. Therefore, a buyers projected rate of return may be much less than what was expected. With life settlements — buyers and sellers beware.

Tagged as: buying someone else's life insurance, decedent, estates, insurance, life insurance, lifetime settlements, trusts