Where does the value come from? I can’t sell my car insurance policy so how is life insurance different?
Who is buying them and why?
UK based if it makes a difference
In: 5
It’s not a ‘sale’ so much as a trade. They’re trading the future lump sum payment for a smaller one now. The person on the other side of the trade gets the future payment.
It works because a funded, vested life insurance is basically guaranteed to pay out, eventually. Everyone dies. It’s just a matter of timing.
Lets say you are kinda up in age. You have no family to speak of, nobody you intend to leave anything to. But you also have yourself a sweet life insurance policy. It doesn’t do you much good though. You don’t have anyone that will get the money, so why not use that payout while you are still alive and can enjoy yourself?
In comes the buyer. Say you have a $1 million dollar policy. They agree to pay you $500,000 right now, that you can spend traveling the world. You designate them the beneficiary of the policy and sign a contract guaranteeing it can’t be changed.
Now you have money to spend while you are alive and they get a 100% return on their investment (minus loss of value due to inflation).
The numbers will be different in real life, I just picked easy math for this example.
This is also how lump sump payouts for annuities work too. The company gives you an immediate payout of sum amount of money, you transfer the annuity payments to them.
In all cases the lump sum payment will be for a lower value than the insurance payout or total annuity payout. That’s how the company profits.
Some predatory companies will approach elderly that actually DO have family or someone that will benefit or need the insurance payout for things like funeral expenses and try to convince them to sell their policies.
It might be different in the UK, but in the US, there are “term life” policies and “whole life” policies. Term life is like car insurance, where it’s basically a subscription service that has no value to another person. If you don’t pay the premium for a month, it’s cancelled and that’s it. With whole life, it’s an investment (a pretty shitty one, in general), but it has a cash value associated with it (most of the money you’ve put into it), and you can sell it if you want to or possibly use it as collateral for a loan, as it is a “marketable security”, AKA something that can be sold for cash relatively easily.
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