Introduction

Traditionally, life insurance buying decisions are built around two basic benefits. The first is protection against the adverse financial consequences of death. The second driving force lies in the tax advantages of life insurance that make it such a powerful tool to achieve specific personal and business financial planning goals.

Nevertheless, circumstances can change that reduce the need for the death protection, the value of the tax advantages of a life insurance policy, or both. What happens then?  Until recently, policyholders had few options.  Since life insurance is fundamentally designed as a buy-and-hold financial instrument, terminating a policy does not favor a policyholder from a financial point of view.   In the case of term coverage -- the policyholder could simply let the policy lapse, terminating future premium payments and any potential death benefit.  In the case of permanent insurance -- the policyholder could surrender the policy in return for a pre-determined cash value (less any surrender charges).  Policyholders who surrender a policy, in effect, sell back the policy to the insurer for that pre-determined amount.  Economists refer to this type of situation as a monopsony:  a market with only one buyer -- in this case, the insurance company.   And as with any constrained market,  monopolies and  monopsonies produce less-than-optimum economic results.

All that has changed in the past couple of decades.  A true secondary market  for life insurance policies has finally emerged -- a market  governed by competitive economic forces.  Initially spurred by the AIDS outbreak in the 1980ís -- and  driven by the need for cash to pay for costly treatments -- life insurance policies have become a marketable financial asset, much like stocks, bonds , real estate, etc.   The old buy-and-hold mindset gave way to a new, more flexible way to think about life insurance.   This course explores this new market and new frame of mind.