Reasons Why Life Settlements are Regulated

As you get older, getting a life insurance policy becomes a necessity. It will especially be beneficial to the ones you leave behind in particular dependents who can really benefit from the payout.

There is a marketplace for life insurance policies where holders can sell their policies in exchange for cash or new policies. When you transact a life insurance policy in exchange for payment, it is called a life settlement.

A lifetime settlement can either be beneficial or detrimental to the policyholder. Therefore, the marketplace has to be regulated.

The following are some main reasons why life settlements are regulated:

Life Insurance Policies are Assets

In a lifetime settlement, a life insurance policy is considered an asset just like stocks, real estate, or bonds. As with all financial assets and investments, regulation is key to ensure fair play.

The Securities and Exchange Commission (SEC) is responsible for the regulation of the sale and purchase of financial instruments including life settlements. However, most of the regulation falls to the state authorities.

The vast majority of dealers in the life settlement marketplace are mutual funds, hedge funds and other institutional investors such as university endowment funds. These entities are regulated by the SEC so when they are involved in lifetime settlements, the SEC also has to vet the transactions.

License Requirements

As stated above, many buyers and sellers of life insurance policies especially in the secondary market are institutional investors. These entities buy and sell other financial instruments but they do require a license in order to sell life insurance policies.

A crucial reason for the regulation of life settlements is to ensure that these companies have the license to engage in the sale and purchase of life insurance policies. Considering the nature of the policies, families can be hard done if they are dealing with a fraudulent party.

The regulation works to deter malevolent parties from taking advantage of gullible individuals who are selling their policies for the money.

Eligibility

The lifetime settlement marketplace is mostly regulated on a state by state basis. The point is to ensure that only eligible parties engage in the buying and selling of life insurance policies.

It is the state department that is responsible for overseeing the conduct and operations of businesses in the marketplace. You can learn more about eligibility from qcapital.com/learning/eligible-states/. The jurisdictions are decentralized to ensure more comprehensive regulation of lifetime settlements.

Eligibility mostly affects the companies that trade life insurance policies. However, it will also affect the individual policyholders as they can also not be eligible to sell their policies.

To Protect Policyholders

Like any other financial instrument or asset, a life insurance policy needs to have a price if it is to be bought or sold. Therefore, some sort of valuation process has to be conducted. However, they are often conducted by the companies who want to buy the policies.

The value of the policy can be affected by a plethora of factors meaning that companies can skew the value in their favor. The less they pay, the more profit they can make when they sell the policy in the secondary market.

Therefore, one of the main reasons why the lifetime settlement market is regulated is so that policyholders are protected from valuations that seek to take advantage of them.

Ensure Funds are Transferred

Though the value of the lifetime settlement may be agreeable to the policyholder, receiving the funds is another thing altogether. Insurance companies and other entities are infamous for delaying payments to clients until absolutely necessary to do so.

Regulation of lifetime settlements ensures that the policyholders get the funds that were agreed upon in the transaction. Otherwise, the sale or purchase may appear final, but the funds were not transferred and such an infraction needs to be corrected.

Taxation Purposes

As with the sale of any other financial instrument, payment of taxes to the relevant authorities is inescapable. Therefore, a significant reason why lifetime settlements are regulated is to ensure that taxes to the government are paid.

It is a relatively straightforward process to calculate the taxation from a lifetime settlement. The proceeds from the sale will usually be taxed as capital gains or ordinary income and may amount to quite a sum.

You should learn as much as possible about how lifetime settlements are taxed, so you don’t overpay. It will also help you avoid fines and penalties for not paying the correct amount of taxes.

There are good reasons why lifetime settlements are regulated. As you can see above, the reasons are mainly to ensure fair play in the lifetime settlement marketplace. You should learn about the various regulations for your benefit and that of your beneficiaries.