Life Settlement Explained

Life Settlement
Image by Birgit Böllinger from Pixabay

It is a legal sale of your life insurance policy to the third party of life settlement provider for lump-sum cash. Usually, the selling price lies between the cash surrender value and the amount of death benefit. Accumulated cash value of the permanent life insurance available for withdrawal is surrender value. The amount paid to the policyholder’s beneficiaries on the event of the policyholder’s death.

Who buys a life insurance policy?

Typically institutional investors are the ones who purchase somebody’s life insurance policy and pay all the future premiums and receive the death benefit when the insured dies.

The benefit to the policyholder

If you decide to sell a life insurance policy you will be entitled to receive a higher amount than in case you surrender your policy for cash but keep in mind it will be always less than the death benefit. This allows you to get cash when in need and get rid you something that is not of any use to you now.  There are several reasons why you should sell your insurance policy:-

  1. Death or divorce from the spouse
  2. Premiums are unaffordable
  3. You need to fund your retirement
  4. You don’t have dependents
  5. You need money for long-term care
  6. You are facing some terminal illness

Benefit to buyer

The reason why someone will buy this is that a purchaser is expecting a good return on their investment. The buyer buys a policy for a price less than its death benefit and they get death benefit on the death of the insurer.  The profit derived is the difference between the death benefit and purchase price.

Life settlement companies work with LEPs who provide life expectancy reports which specify average existence time keeping his medical conditions, gender, age, addiction, etc in consideration. Life expectancy has a major role to play in buying and selling of the policy. The lesser is the life expectancy, higher is the sale price and less time required to make a transaction.

Who is eligible to sell a life insurance policy?

  • Policyholder aged  65 or more
  • Have a policy in force with a death benefit of at least $100,000
  • The policy must be at least two years old
  • The type of policy should be one of these types Universal Life, Whole Life, Term, Convertible Term, Joint, and Second-to-Die life insurance policies, issued by a US-based insurance carrier

Few facts to know

  • Once the policy is sold, you are no longer liable to any premiums, all the future will be paid by the new owner.
  • After-sale all the rights and ownership are transferred to the buyer. You will be contacted by the buyer to know about your health. And the buyer will receive death benefits on your death.
  • Taxes are applicable to the cash value that you will receive, tax exemption can be availed in some cases; better discuss it with your financial advisor.
  • You are going to need a professional life settlement provider/broker or an expert in this industry as life settlement involves various legal and financial transactions that are complex and not anyone can deal with it. Seeking professional financial assistance is highly suggested.
  • There are two terms involved one is life settlement and the other is Viatical settlement. A viatical settlement is meant only for the policyholder suffering from a terminal illness with a life expectancy of less than two years. Such policyholders can sell their insurance policy to meet their medical bills and treatment. In viatical, there is no age criterion whereas in life settlement the age should be more than 65 years. 
  • Broker’scommission is to be paid.
  • Your privacy is assured, your medical records, financial transaction, and personal information are kept confidential through a written agreement. Contact information is used by the buyer for confirmation of your health status.
  • Life settlement might take a few weeks to a few months from finding a buyer until finally closing the deal.
  • You are free to use the life settlement money

The value of the policy depends on your age, gender, health, life expectancy; the value of the policy, amount of premiums you have been paying so consulting a professional life settlement provider will help to get you the maximum life settlement value.