Life Settlement

A life settlement is a financial transaction in which you sell your existing life insurance policy to a third party. It’s not the same thing as surrendering your policy back to the original policyholder for the accumulated cash value.

Instead, you get a lump-sum payment, larger than the cash surrender value of your policy but less than the full payout value, to use immediately. The third-party buyer becomes the new owner of the policy, paying any premiums and collecting the full death benefit payout in time.

People sometimes choose life settlements if they no longer need or want life insurance when their personal and/or financial circumstances change. For instance, if your beneficiary dies before you or your dependents no longer need the assurance your coverage provides, you might consider a life settlement.

If your premiums become burdensome or if you need money but want more than the cash surrender value of your policy, then a life settlement might be an attractive option for you.

How They’re Regulated

A U.S. Supreme Court decision in 1911 allowed life insurance policies to be bought and sold as the AIDS crisis of the 1980s pushed the life settlement practice into high gear. Regulations and model acts were created and amended by associations like the National Association of Insurance Commissioners (NAIC) and the National Council of Insurance Legislators (NCOIL) in order to protect policyholders.

Life settlements are regulated at the state level by the Department of Insurance. These regulations cover many aspects of life settlement agreements, including the following.

Specific regulations can vary from state to state. The only states without any life settlement regulation currently are Alabama, Missouri, South Carolina, South Dakota, Wyoming and Washington DC.

You can receive a life settlement through a life settlement company or broker. A life settlement company is either an insurance or investment company, whereas a broker is an independent agent who works to get the highest bid for you.

The first step in the process is to complete an application. You’ll need to provide details about your policy, your health and possibly other life and financial details. All your information must be backed up by proper documentation, especially your medical history.

The life settlement company will review all your documents for accuracy and thoroughness. Then, your application will go through the underwriting process.

The final life expectancy report is submitted to parties interested in making a purchase offer. You may receive multiple offers, but you are not obliged to accept any of them.

If you do accept an offer, you’ll sign a contract to finalize the sale. The money will be put in escrow and transferred to you once all the paperwork has cleared. If you hire a broker, then broker fees and expenses are paid out of escrow.

Once the policy is transferred, the settlement company becomes the new owner and will pay any premiums going forward.

After the sale, most states require an interval during which you can change your mind. The length of that period varies by state but is usually somewhere between one to two weeks long. During this period, you can cancel the sale, return the funds and re-take ownership of your life insurance.

The amount of settlement you receive will depend on several factors, most importantly your age and health condition, the amount of your premiums and the full value of your policy. Generally, any offer will be higher than the cash surrender value of your policy but substantially lower than the entire amount of the death benefit.

To be eligible for a life settlement, you must typically be 65 or older and hold a current policy that’s worth at least $100,000. The exact age, amount and length of time you must have held your policy differ from state to state.

For example, some states allow for life settlements at younger ages in the case of serious health conditions while others may require sellers to be at least 70 years old or hold policies worth more than $100,000.

Types of Policies You Can Sell

According to the Life Insurance Settlement Association (LISA), term, whole life, adjustable, universal and even some group life policies qualify for life settlements. However, that does not mean life settlement providers will purchase every policy.

The biggest appeal of a life settlement is to have money that you can use immediately while you are still alive. The downside is that the purchaser will receive the full death benefit of your policy, rather than your original beneficiary.

Advantages

A life settlement can immediately increase your cash flow with a lump-sum payment. In addition to having an influx of cash, a life settlement also means you will no longer have to pay policy premiums, eliminating that monthly expense. Plus, if the policy you’re selling was an individual policy held by a company, you’ll turn a fixed asset into something liquid and accessible.

Disadvantages

The biggest drawbacks to a life settlement are that you’ll receive only a percentage of the value of your policy and that your original beneficiary will not receive a benefit.

In addition, there are tax implications to a life settlement that you otherwise wouldn’t pay if a beneficiary were to receive a death benefit. So, a life settlement might affect your ability to receive funding from public social services like Medicaid. Finally, selling your life insurance policy may make it harder to obtain other life insurance in the future.

The difference between a life and a viatical settlement is the health of the policyholder. To qualify for a viatical settlement, you must be either terminally or chronically ill. There is no age requirement for a viatical settlement.

There are many reasons you might sell your life insurance. For example, you might have a sudden unexpected need for cash. Perhaps your spouse or original beneficiary has died, or you simply no longer need the policy.

If you need — or want — a lump sum to use immediately while you are still alive, a life settlement might be the right answer for you. You won’t get the same payout your beneficiary would have, but the money will be yours to do with as you wish.

Reasons To Sell

While there may be tax implications for a life settlement, there are no restrictions on what you can use the money for.

You might use a life settlement to cover medical treatment or to pay down debt, like a mortgage, car or education loan. One may also use the money for home repairs or even to enjoy travel and other leisure pursuits. There are no stipulations on how you can use your life settlement.

Alternatives

A life settlement may not be suitable for you in every circumstance, especially if you want to leave something for your beneficiaries. There are other options to consider.