Life’s settlements

Q:

What’s a life settlement? — P.N., Chesterfield, Mo.

A:

It’s when someone invests in someone else’s life insurance policy, essentially buying the death benefit. The seller may be seeking income or may not be able to keep paying the premiums. Sellers are often very old and/or very sick. When a life settlement involves a terminally ill seller, it’s often referred to as a “viatical” settlement.

A life settlement buyer will typically pay less than the policy’s death benefit, but more than the cash surrender value. Rates can vary widely, but here’s a simple example: If a policy is set to pay $500,000 upon the seller’s death, the buyer might pay $300,000 for it. When the seller dies, the buyer would receive the $500,000, netting a $200,000 profit.

These settlements can be win-win propositions for everyone involved, but there are some caveats. For starters, sellers often have other options. For example, they might be able to borrow against their policy, or they may qualify for part of the benefit before death. Buyers, meanwhile, may not get the great return they hoped for if the seller lives much longer than expected, and they may pay significant premiums. These settlements can be complex, so do a lot of research before entering into one. You can learn more at Forbes.com/advisor/life-insurance/life-settlements.

Q:

What are “convertible” investments? — D.E., Ardmore, Pa.

A:

They’re securities such as bonds or preferred stock that can be converted into shares of ordinary common stock — at a certain price or in certain circumstances. They may provide more income than a common stock and potentially more gain than a regular bond, but they can be complicated and aren’t best for beginning investors.