Life Settlement Basics
A life settlement allows policyholders to sell an existing life insurance policy for cash. The cash amount received by the seller is generally greater than the cash surrender value but less than the death benefit value.
A death benefit is the tax-free payout beneficiaries receive when the life insurance policyholder passes away.
The cash surrender value — also known as the cash value — is the cash amount the policyholder will receive in exchange for part or all of their insurance policy’s value. If the owner chooses to surrender their life insurance contract before the end of the term period, they can receive the accumulated savings, or cash value, instead of the death benefit.
The face value of a life insurance policy is the overall value of the policy. In most circumstances, it refers specifically to the death benefit. So, the face value and death benefit are typically the same amount.
Viatical settlements are financial solutions meant for terminally ill candidates of any age with a life expectancy of less than five years. Life settlements are for those who are not terminally ill — they simply no longer have a need or want for life insurance coverage.
Yes, life settlements are legal. However, you cannot purchase a new life insurance policy with the intention of selling it to a third party. This is considered a stranger-originated life insurance (STOLI) transaction, which is illegal in most states.
In my experience, many individuals do not know this is an option. When considering such a transaction, make sure to seek the assistance of an insurance professional who specializes in life settlement transactions. It is likely that common insurance agents and brokers have either never facilitated a life settlement or have done so quite infrequently.
How Life Settlements Work
Life settlements are financial solutions meant for seniors over the age of 65.
• Be older than 65, with life expectancy over five years
• Have an active policy with a death benefit of at least $100,000
• Have had the policy active for a minimum number of years, according to your state
All types of life insurance policies can be eligible for life settlements. Be sure to consult with an insurance provider prior to the sale to discuss your life insurance settlement options.
Should you choose to sell your life insurance policy, understand there may be a few drawbacks, including:
• If you are in significant debt, your life settlement could be seized by creditors.
• You may have to pay taxes on your settlement disbursement.
• If you are on a fixed income or receive financial assistance — such as Medicaid, Social Security income, public medical services, etc. — your benefits could be affected.
• Your family members could lose their life insurance coverage if they were included in your contract.
Professional life expectancy firms calculate your life expectancy based on your age, sex, medical history and medical condition, as well as other factors against a similar group of individuals.
Life settlement recipients have full freedom and flexibility to use their money however they choose.
Say you’re looking to sell a life insurance policy with a death benefit of $200,000. A life settlement purchasing company could offer you a lump sum payment of $40,000 for the policy. You would receive this money immediately. When you pass away, the buyer then receives the $200,000 death benefit.
Life Settlement Taxes and Fees
Your life settlement could be taxed at a federal and state level. Taxation rules vary depending on which state you live in. However, some settlement transactions are tax exempt. Be sure to discuss the details with a financial advisor or other professional.
While there are no out-of-pocket costs for pursuing a life settlement, this doesn’t mean the process is entirely free. You should account for commission fees if you plan to hire a broker or financial advisor.
Once the policy is sold, the buyer, or new policy owner, will be responsible for future premium payments.
Selling Your Life Insurance Policy
Your life insurance policy’s worth is generally greater than the cash surrender value but less than the death benefit value.
No. You have the option to sell a portion of your policy rather than the entire value. You can sell a portion of your policy, pay off your premium payments and still maintain a portion of your death benefit.
Life settlement companies buy life insurance policies. Make sure the company you’re considering is licensed in your state.
While a broker isn’t required to sell your policy, guidance from a professional is recommended. Life settlements can be complex transactions that include legal parameters. A broker can help you navigate the life settlement sale process, help you with paperwork and ensure the best sale price for your contract.
On average, a life settlement transaction takes three to five months from start to finish.
If you have multiple life insurance policies, then you should be able to sell all of them. You may not be able to get the same rate or amount for each policy. Your payout will vary based on the specific policy.
There are several alternatives to a life settlement if you need immediate cash.
• Borrow from your cash value in the form of a loan. Note that you’ll have to pay back the money with interest to maintain the full death benefit.
• Surrender your life insurance policy.
• See if your policy has an accelerated death benefit or riders for cash access.
Check with your state insurance commissioner to verify that the life settlement company or broker is licensed in your state. Make sure to confirm commission costs, compare bids to avoid lowball offers and affirm that your privacy is protected within your contract.
After You Sell Your Life Settlement Policy
Once the policy is sold, all rights and ownership are transferred to the new owner or investor. They are responsible for all future premium payments until the policy matures. At that point, the new owner will be able to receive the death benefit of the insurance contract.
After your contract is signed, most states give a grace period of 15 to 30 days to change your mind about selling your life settlement. In this case, you’ll need to return the lump sum and any premiums the buyer paid.
Your privacy is ensured when making this sale transaction.
• There is written consent.
• It is needed for investigation or governmental examination.
• It is a condition of the buyer for successful transfer of ownership.
• A life settlement provider or appropriate representative needs it for confirmation of your health status.