As with any complex transaction, there are a number of concerns about the life settlement transaction. If you simply Google the term, you will see that the industry has been written about extensively and many of those articles are not positive. Many of these issues are valid and the industry has worked hard to clean these issues and make the product safe for consumers. Here are the top 3 concerns that consumers have.
Historically, life settlement commissions have been an issue. In the industry's earlier days, there were many unethical brokers who used an opaque market to take advantage of desperate seniors. These individuals charged unreasonable commissions to sell their policy - as high as 50% of the settlement amount - and did not properly disclose this fact to the consumer.
As a result, consumers were hurt and the industry's reputation was tainted. Since then, lawmakers have passed more regulation to protect consumers from such acts - including placing a cap on the commission rate at 30% of the settlement value and requiring upfront disclosure. Today, many of these unethical individuals have been forced out of business, but it's still important to be careful of such brokers.
Make sure to shop around and ask for their rates - any legitimate broker will provide this to you in advance of an engagement.
The second largest concern is privacy. In order for buyers to evaluate a policy, the buyer must have access to a number of personal details including medical records. Additionally, if one engages in the transaction, the insured may occasionally (at a frequency that is in compliance with state regulation) receive a call from a servicing company to inquire upon the health of the insured.
The final main concern is that the transaction inherently feels uncomfortable because a third party stands to profit when the insured passes away. This is logical and understandable.
To mitigate this concern, today, policies are generally bundled together along with hundreds of other policies and are sold as a package - or sometimes even fractions of packages - to large institutional funds. The investor is diversified against the risk of any single policy's financial impact.
Furthermore, there has never been a reported instance of foul play or personal harm in a relation to a life settlement. That being said, we wouldn't recommend selling your policy directly to an individual investor (such as a high net worth individual). Instead, work with professionals who represent reputable large financial institutions.
Finally, it's worth noting that the economics of a life settlement are really quite similar to that of an annuity - a common instrument used in financial planning. Sellers of annuities also stand to profit upon the passing away of an individual. And similar to life settlements, there have never been any cases of foul play.