Life Insurance Settlements
Seniors may benefit from selling life insurance settlements to help pay for ongoing medical bills, maintain a higher quality of life, or share their wealth with their family.
What is a Life Settlement?
A life settlement is a lump sum payment made in exchange for selling a life insurance policy. Life settlements — also referred to as senior settlements — are trade-offs between the policyholder and the purchaser. If a life insurance policy becomes too expensive to pay for, or if there is no longer a need for the policy, the policyholder can sell their contract to a third party in exchange for a one time lump sum.
There are a number of reasons why someone may want to sell their life insurance policy, including:
- Financing retirement
- Paying for college tuition
- Long-term medical costs
- Policy owner has no heirs to leave remaining assets to
- Buying a new home
- Policy owner can no longer afford premium payments
How Do Life Settlements Work?
Receiving a life settlement involves selling a life insurance policy to a third-party investor in exchange for a lump sum of cash. Once sold, the buyer assumes responsibility and all future premium payments on the policy. Upon the original owner’s death and completion of premium payments, the buyer will receive the full death benefit.
Most investors are interested in policies that have a death benefit of at least $100,000.
This means investors will be able to receive $100,000 after paying the remaining premium balance. However, the cash disbursed from the settlement will be much less than the value of the policy. As the policyholder, you may only receive a fraction of the full amount in exchange for receiving the funds up front and immediately.
Who Qualifies for a Life Settlement?
Life settlements are typically meant for seniors, or individuals over the age of 65. However, not all senior policyholders make good candidates for a life settlement. In order to qualify in receiving a life settlement, seniors must meet certain criteria:
- Life Expectancy – Buyers are reluctant to invest in a policy if the candidate has a longer life expectancy. The shorter the life expectancy, the quicker the buyer will be able to collect the death benefit and the lower the amount of premiums they will have to pay. Buyers often look for policyholders who are at least 70 years of age.
- Policy Value – In order to qualify for a life settlement, the death benefit — the amount paid to a beneficiary after the policyholder’s death — must be at least $100,000. Anything under that value will not attract much interest from potential buyers.
- Length of Policy – To receive the life settlement benefits, your policy must be active for at least two years.
- Type of Policy – Life settlements are not subject to one type of life insurance policy. Although universal life insurance and term life insurance policies are the most common and allow for the most compelling offers, all types of policies can qualify to sell for a life settlement.
Pros and Cons of Life Settlements
Any financial decision comes with its own set of considerations and drawbacks. The same applies to receiving a life settlement. Before making the decision to sell your life insurance policy, consider some of the pros and cons to help you determine whether or not receiving a life settlement is the best financial option for you.
- Quick Access to Funds – Life isn’t always predictable, and sometimes you may need fast cash to help with emergencies. Life settlements will be able to provide the fast access to the cash you need.
- Additional Retirement Money – Retirement income may not be enough to live off of comfortably. Receiving a life settlement will allow for you to make ends meet and can combine with your existing retirement income as monthly payments.
- Gifts to Family – Rather than leaving a payout to your beneficiaries, life settlements can help you create lasting memories with your family. The income from this settlement can provide the ability of taking a family trip or buy a house for your children, for example.
- No More Monthly Premiums – Paying life insurance policies can become expensive over time. Once you’ve retired, you may not be able to afford the premiums anymore. Receiving a life settlement eliminates the burden of paying expensive premiums and redistributes some of the money you’ve already spent.
- Relieve Debt – With older age comes health concerns and sometimes expensive medical bills. Life settlements can help to fund treatment, pay for hospice bills and other ongoing medical expenses.
- Creditors Can Seize Benefits – If you are in significant debt, creditors may seize your funds before you have a chance to use them. Before considering a life settlement, assess how much debt you have remaining, unless the goal is to pay off all of your debt.
- Eliminated Inheritances – Cashing in your policy for a life settlement eliminates the idea of leaving money for your beneficiaries from your life insurance policy.
- Outliving Your Settlement – If you cash in your life insurance policy early, there is the possibility you will outlive the settlement funds.
- Settlement Income Can Affect Government Benefits – Sometimes, life settlements can negatively affect or clash with government benefits. If you are on a fixed income and receive government benefits, do your research to discover whether or not a life settlement can affect your status.
Receiving a Life Insurance Settlement
There are two common payout options for receiving a life settlement: lump sum and structured settlement. Typically, policyholders will receive a full lump sum payout in exchange for selling their life insurance policies. A full payout allows seniors full freedom over their disbursement to pay bills, buy a new home, pay for health treatments and more. A full payout has the most flexibility.
Structured settlement payments guarantee a steady income stream over time to help secure financial stability.
On the other hand, a structured settlement allows for seniors to pay for ongoing medical bills, larger expenses and debt. It also guarantees a steady income stream for months or years. Although it lacks the flexibility of a lump sum payment, a structured settlement can help to ensure some financial stability over a period of time.
- Bayston, D. (2016, February 4). Do You Qualify for a Life Settlement? Retrieved from http://www.lisa.org/life-policy-owners/consumer-blog/blog/2016/02/04/do-you-qualify-for-a-life-settlement
- Kadlec, D. (2014, November 5). The Creepy Truth About Life Settlements. Retrieved from http://time.com/money/3556983/life-settlements-creepy-truth/
- Holbrook, A., & Glover, L. (2017, January 6). Life Settlements: Selling Your Life Insurance Policy. Retrieved from https://www.nerdwallet.com/blog/insurance/considerations-when-selling-life-insurance-policy/
- Wang, L. (2016, January 12). Life Settlements: Selling A Life Insurance Policy That's No Longer Wanted for More than Its Cash Value. Retrieved from https://www.kitces.com/blog/life-settlements-selling-a-life-insurance-policy-thats-no-longer-wanted-for-more-than-its-cash-value/