Life insurance policy owners may be able to sell or borrow against their policies in the secondary market for life insurance. You can not buy coverage on your life in the secondary life insurance market. What is now known as the secondary life insurance market has only been around since the 1980’s. The secondary market exists to bring together willing sellers and willing buyers of existing life insurance policies.
Distinguishing between primary and secondary markets
All of the life insurance companies, the business entities that write insurance policies, operate in the primary market for insurance. When you apply for a term life, whole life or other type of life insurance policy, you do so in the primary market. You can think of it like the car market where new car dealers operate in the primary market and used car dealers operate in the secondary market.
The secondary market consists of individuals and companies whose business it is to purchase existing insurance policies at a discount to face value and eventually realize a profit when the insured dies and they can collect the death benefit of the policy. Usually, these policies are bundled into multi-million dollar packages and sold to institutional investors.
Evolution of the secondary market for life insurance
In a capitalist society, where there is a need and money to be made, someone will recognize the need and quickly step in and fill that need. Such is the case with the evolution and rise to prominence of the secondary life insurance market.
In the early 1980’s, when the AIDS epidemic was causing the premature death, mostly of young males, many of those patients with life insurance policies had an immediate need for funds to help pay for their treatment and provide some comfort in their remaining days. Viatical settlements were introduced into the secondary market to provide advanced death benefits for the terminally ill patients. As more was learned about the disease, patients started living longer, but still had a shortened life expectancy.
Viatical settlements helped those with 24 months or less to live, but did not apply for patients who were expected to live for six or maybe seven more years. Those patients, many of whom were single and had no beneficiaries to worry about, still needed money and a high level of medical care. Life settlements became the next important product in the secondary market for life insurance.
Every market needs a buyer and a seller
If you purchased a whole life policy twenty years ago, and for whatever reason, decide you no longer want or need the policy, you have the right to sell it just like any other asset you might own. Policies build up not only cash value over time, but they also become more valuable as you get older and closer to the end of your life. If you suffer a serious decline in health that will likely lead to an earlier death than the actuarial tables would predict (for a healthy person of your same age), your policy becomes worth more.
You have something buyers in the secondary market want and are willing to pay a lot more for than your policy’s surrender value. If you are considering the sale of your life insurance policy, the best thing to do is to get your policy valued to know approximately how much you can get for it in the secondary market for life insurance.