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Life insurance settlements, also known as “life settlements” and “senior settlements” are life insurance policies that have been sold to a third party. The sale of a life insurance policy is an often untapped, potential source of cash for people who may not need life insurance but have other immediate financial needs, such as medical debt.
But experts caution that abuses are not uncommon, regulation is inconsistent, and anyone looking to sell a life insurance policy to a third party should be wary.
The purchaser, typically investors, takes over the life insurance payments and become the beneficiaries at the time of the former policy holder’s death. Life settlements are generally for people with life expectancies of between two and 10 years.
Dying AIDS Patients Were Among the First to Sell Policies
The life settlement industry as it exists today developed much more recently, around 1998. It came from a related industry, known as viatical settlements, which is a sale of a life insurance policy by someone who is terminally or chronically ill.
Viatical settlements grew out of the AIDS crisis of the 1980s. For years, the virus was always fatal, and young men with life insurance policies formed a market for a brand new product.
At first, viatical settlements were purchased by individual investors who profited when people died from AIDS. Eventually, insurance companies and banks entered the unregulated market. As medications were introduced to treat AIDS, people who had sold their life insurance policies began to live longer, with investors still waiting for their deaths.
The industry transitioned to life settlements, focusing on the elderly and sick.
While still small, the life settlements industry has seen double-digit growth in recent years. Analysts expect the market to continue grow in the coming years and forecast an increase in advertising directed at consumers.
Among the reasons for the expected growth are the fact that the population is getting older and the growing awareness of life settlements.
How Life Settlements Work
When you buy life insurance, the younger and healthier you are, the lower the cost to you and the easier it is to get a policy. When you have a policy and want to sell it in a life settlement, the older and sicker you are, the easier it will be for you to sell it and the more money you’ll be able to get for it.
Eligibility and Settlement Offers
In general, candidates for life settlements are typically older than 65 and hold life insurance policies with death benefits higher than $100,000. Younger policy holders may qualify if they have certain serious health conditions. However, if you’re younger than 70 years old with no serious health problems, you’re unlikely to get a bid for more than the surrender value of the policy.
The goal of selling a life insurance policy is to get more than the policy’s cash value should the policy holder surrender it to the insurance company. However, this would be substantially less than the value of the death benefit. Typically, this would be about 10 to 25 percent of the policy benefit amount.
The settlement amount is likely to be further reduced by the costs of the transaction, including commissions and fees, as well as taxes due. However, each case is different, depending on a number of factors.
Whether you qualify to sell your policy and how much you can get for it are determined by your age, health status and the details of your life insurance policy, including the cost of the premiums.
When you’re seeking a life settlement, you will have to fill out a lot of paperwork and share your medical records. The buyer will use this information, along with your race, gender, family medical history and lifestyle, to determine your life expectancy. You may even have to get a medical exam.
The Financial Industry Regulatory Authority (FINRA) says there are legitimate reasons for life settlements, as well as reasons to be wary.
“When you sell your life insurance policy, whoever buys it is acquiring a financial interest in your death,” FINRA cautions. This kind of transaction “may target seniors who may be in poor health. It can be prone to aggressive sales tactics and abuse,” FINRA says.
Regulation Handled by States
Life settlements are regulated at the state level, with 42 states and Puerto Rico having laws of varying degree on the books. That leaves eight states and the District of Columbia with no regulation of these transactions. Critics say this is inconsistent and confusing.
The majority of the states that regulate life settlements require a minimum of two years between the purchase and sale of a life insurance policy. A total of ten states require five-year waits. Minnesota requires four years. Most of these states grant exemptions from the waiting periods in specific circumstances, such as divorce, retirement or terminal illness.
Investing in Life Settlements
Life settlement companies often bundle policies into funds and sell interest in the funds to investors. Doing this mitigates the risk of individual, original policy holders outliving expectations.
This is another area in which abuse has occurred and risks can be high. One potential risk to investors is that insurance companies may refuse to pay benefits because of alleged problems with the policies. Or the insurance companies may go bankrupt. Investing fees may be high and include large commissions for brokers.
In some cases, government regulators have sued life settlement companies, accusing them of misleading investors. For example, a California firm was accused by the Securities and Exchange Commission of hiding from investors that the insurance policy holders were living longer than expected.
Why Sell Your Life Insurance Policy?
Every year, about 4.5 percent of life insurance policies in the United States are allowed to lapse. The owners of those policies simply stop paying the premiums and lose their financial interest in these policies, a loss of about $900 billion in benefits to policy holders annually.
There are several valid reasons someone might no longer need a life insurance policy. For example, maybe the beneficiary is deceased or no longer needs the support. Maybe the policy was purchased to provide for children who are now adults able to provide for themselves.
Downsides and Cautions
Unlike life insurance proceeds inherited by your beneficiaries, the money you get in your life settlement will be subject to taxation. And it may affect whether you’re eligible to receive public assistance, such as Medicaid. These funds could also limit your ability to get another life insurance policy, should you need or want one, because it will count against the amount for which your life is insured.
FINRA says they can have high costs and unintended consequences. It’s tough to find out what a fair price would be for your policy.
You should do as much research as possible and ask a lot of questions about the fees, commissions, taxes and other costs. If you’re using a broker, you can look into his or her professional background using FINRA’s BrokerCheck.
- Study your life insurance policy so you completely understand what’s in it and what other options you have.
- Research life settlements.
- Compare offers from more than one potential buyer.
- Deal only with licensed purchasers and brokers.
- Check with your state insurance commissioner to see if your settlement company or broker is licensed and if there are complaints on record.
- Ask what will ultimately happen to your policy and how your personal, medical information may be protected or exposed.
Alternatives to Life Settlements
Before committing to a life settlement, it’s a good idea to make sure you understand all the costs and downsides. You also should explore whether other options might be better for your situation.
- See if you can get a loan against your policy value.
- Cash out the policy to the insurance company for a reduced sum.
- Pursue accelerated death benefits if you are terminally ill or have a long-term condition that qualifies. This allows you to receive policy benefits before you die.
- A 1035 exchange is a way to exchange one insurance policy for another without paying taxes on the gains on the first life insurance contract. This transaction is governed by Section 1035 of the Internal Revenue Code.
- Ask your beneficiaries to cover the cost of your premium payments.
- Ask your insurance company if the policy can be changed to eliminate premiums and lower the amount of the death benefit.
- Consider donating the policy to a charity or community foundation. The Insuring a Better World Fund can help with that.
- To raise cash, look into selling annuity payments.
As with all financial decisions, you must consider your personal needs and do your research before you sell your life insurance policy. For some, life settlements make sense, but for others, there are better options.
17 Cited Research Articles
- Bayston, D. (2019, February 6). 3 Life Settlement Trends to Watch In 2019. Retrieved from https://insurancenewsnet.com/innarticle/3-life-settlement-trends-to-watch-in-2019#.XGXVeTPYqUl
- Financial Industry Regulatory Authority. (2015, September 25). Selling Your Life Insurance Policy: Is Quick Cash Worth It? Retrieved from http://www.finra.org/investors/selling-your-life-insurance-policy-quick-cash-worth-it
- Financial Industry Regulatory Authority. (n.d.). Seniors Beware: What You Should Know About Life Settlements. Retrieved from http://www.finra.org/sites/default/files/InvestorDocument/p125848.pdf
- Gibson, C. (2019, January 25). Why Life Settlements Will Continue To See Growth. Retrieved from https://insurancenewsnet.com/innarticle/why-life-settlements-will-continue-to-see-growth#.XGXXmTPYqUl
- Government Accountability Office. (2010, July). Life Insurance Settlements: Regulatory Inconsistencies May Pose a Number of Challenges. Retrieved from https://www.gao.gov/assets/310/306974.pdf
- Hicks, C. (2017, October 17). The Morbid Niche of Life Settlement Funds. Retrieved from https://money.usnews.com/investing/funds/articles/2017-10-17/the-morbid-niche-of-life-settlement-funds
- 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/
- Kagan, J. (2018, March 8). Life Settlement. Retrieved from https://www.investopedia.com/terms/l/life_settlement.asp
- Kitces, M. (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/
- Laiose, E. (2015, July). Life Settlements Can Be a Big Risk. Retrieved from https://www.kiplinger.com/article/retirement/T037-C000-S004-life-settlements-can-be-a-big-risk.html
- Life Insurance Settlement Association. (n.d.). History of Life Settlements in the US. Retrieved from https://www.lisa.org/industry-resources/history-of-life-settlements-in-the-us
- Lowery, J. (2018, October 4). The Gay Men Who Have Lived for Years With Someone Waiting on Their Death. Retrieved from https://www.theatlantic.com/health/archive/2018/10/viatical-settlements-aids-gay-men/572044/
- Schoeff, M. (2015, April 8). SEC goes after firm for fraud tied to life settlements. Retrieved from https://www.investmentnews.com/article/20150408/FREE/150409925/sec-goes-after-firm-for-fraud-tied-to-life-settlements
- Span, P. (2017, October 13.). Wringing Cash From Life Insurance. Retrieved from https://www.nytimes.com/2017/10/13/health/life-insurance-policy-settlements.html
- U.S. Securities and Exchange Commission. (2011, January 1). Investor Bulletin on Life Settlements. Retrieved from https://www.sec.gov/investor/alerts/lifesettlements-bulletin.htm
- U.S. Supreme Court. (1911, November 10). Grigsby v. Russell. Retrieved from https://supreme.justia.com/cases/federal/us/222/149/
- Weinberger, R.S. & Katz, P.N. (2018, May 21). Life Settlement Prospects Are All Around You. Retrieved from https://www.thinkadvisor.com/2018/05/21/life-settlement-prospects-are-all-around-you/