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What is a life settlement?
A life settlement is the sale or exchange of a life insurance policy for a lump sum of cash greater than the cash surrender value but less than the death benefit value.
What is the cash surrender value?
The cash surrender value — also known as the cash value — is the cash amount offered to the policyholder in exchange for part or all of their insurance policy’s value. In cash value life insurance policies, policyholders are provided with a death benefit and a savings component that accumulates with every premium payment. If the owner chooses to terminate their life insurance contract before the end of the term period, they are able to receive the accumulated savings, or cash value, rather than the death benefit. An owner can also borrow from their cash value in the form of a loan, but then has to pay back the money with interest to maintain the full death benefit.
What is a death benefit?
The death benefit is the amount on a life insurance policy provided to the beneficiary upon the death of the policyholder.
Who can receive a life settlement?
Life settlements are financial solutions meant for seniors over the age of 65.
In order to qualify to receive a life settlement, senior policyholders must:
- Be over the age of 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 at least two years
What happens after I sell my policy?
Once the policy is sold, all rights and ownership are transferred to the new owner or investor. They are then 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.
Will I have to pay taxes on my life settlement?
Yes, you may have to pay taxes on your disbursement. However, there are some settlement transactions considered to be tax exempt. Be sure to discuss the details with a financial advisor or other professional.
Can I change my mind?
This differs from one state to the next. Some states provide 15 to 30 days after receiving the settlement disbursement to change your mind. Be sure to discuss your options with all potential buyers.
Who will buy my insurance policy?
Insurance providers will purchase your policy directly from you or through a financial broker.
What types of life insurance are eligible for life settlements?
Life settlements are not subject to one type of life insurance. While there are some more lucrative than others, all types of insurance policies qualify. Be sure to consult with an insurance provider prior to pursuing a life settlement to discuss your options.
Will I need a broker to sell my life insurance policy?
Life settlements can be complex transactions that include legal parameters. In order to maximize what you receive for the value of your policy, it is highly recommended you seek professional financial assistance from an advisor or broker. They can help you navigate the sale process, help you with paperwork and ensure the best sale price for your contract.
What’s the difference between a viatical settlement and a life settlement?
Viatical settlements are financial solutions meant for terminally-ill candidates of any age with a life expectancy of less than five years. These policyholders would sell their life insurance policy in exchange for immediate cash, which is typically used to pay for medical expenses and last wishes.
Life settlements are meant for seniors, age 65 or older, who have a life expectancy of more than five years. The money disbursed from the settlement can be used for whatever the recipient chooses.
Do I need to pay any fees for a life settlement?
There are no application, appraisal or processing charges to apply for a life settlement. If you hire a broker or financial advisor, they could charge a commission for their services.
Is privacy enforced surrounding my policy transaction?
Your privacy is ensured when making this sale transaction.
Most times, the identity, financial and medical information is kept confidential unless:
- 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.
How long does the life settlement transaction take?
On average, a life settlement transaction takes a few months to fully complete due to the involvement of outside entities. Consult with your financial advisor on specific details concerning your life settlement application.
How is my life expectancy calculated?
Professional life expectancy firms calculate your lifespan based on your age, gender, medical history and medical condition as well as other factors against a similar group of individuals. The firm then provides you with an average life expectancy, and it is formulated based on your specific situation.
Are there any restrictions on how to use the settlement money?
Life settlement recipients have full freedom and flexibility to use their money however they choose.
Do I have to sell my entire life insurance policy?
No. You do have the option of selling 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. Discuss your options with your financial advisor and insurance provider.
How much is my policy worth?
All policies are not created equal. Payouts differ depending on the value of your policy and the sale offer.
What else is affected by a life settlement?
Should you choose to sell your life insurance policy, understand there may be a few drawbacks:
- 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 — 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.
- You could lose rights and benefits from your initial policy.
Who can help me sell my life insurance policy?
Your attorney and accountant may be useful when determining if a life settlement is right for you. You may also contact the Annuity.org helpline to ask questions or get a referral to possible buyers, such as our trusted partner.
5 Cited Research Articles
- 360 Degrees of Financial Literacy. (n.d.). Term vs. Cash Value Life Insurance. Retrieved from https://www.360financialliteracy.org/Topics/Spending-Saving/Insurance/Life-Insurance-Understand-Your-Choices
- Bayston, D. (2016, February 4). Do You Qualify for a Life Settlement? Retrieved from https://www.lisa.org/life-policy-owners/consumer-blog/blog/2016/02/04/do-you-qualify-for-a-life-settlement
- Frequently Asked Questions | LISA. (n.d.). Retrieved from https://www.lisa.org/life-policy-owners/frequently-asked-questions
- 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/
- Marquand, B. (2017, February 27). Cash Value Life Insurance: Is It Right for You? - NerdWallet. Retrieved from https://www.nerdwallet.com/blog/insurance/should-you-consider-cash-value-life-insurance/