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- Updated: September 13, 2022
- This page features 3 Cited Research Articles
Life Settlement BasicsWhat 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 a Death Benefit?The death benefit is the amount on a life insurance policy provided to the beneficiary upon the death of the policyholder.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 the Face Value?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.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.Are Life Settlements Legal?Yes, life settlements are legal. Companies that participate in life settlements must be registered and licensed at the state level. When looking to sell your life insurance policy, it is important to check your state’s registry and ensure you are dealing with a legitimate company.
How Life Settlements WorkWho Is Eligible for 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 yearsWhat 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.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.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.Example of How a Life Settlement WorksSay that you are older and have a life insurance policy with a death benefit of $200,000. If you wanted to sell your policy, then you could field offers from companies that deal with life settlements. You could be offered a lump sum payment of $40,000 for the policy. You would receive this money immediately. When you eventually die, the buyer then receives the $200,000 death benefit.
Taxes and FeesWill 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.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.
Selling Your Life Insurance PolicyHow Much Is My Policy Worth?All policies are not created equal. Payouts differ depending on the value of your policy and the sale offer.Do I Have to Sell My Entire Life Insurance Policy?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. Discuss your options with your financial advisor and insurance provider.What Companies Buy Life Insurance Policies?Insurance providers will purchase your policy directly from you or through a financial broker. Companies may be licensed at the state level.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.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.Is It Possible To Sell Multiple Policies?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 depend and vary on the specific policy.Are There Alternatives to a Life Settlement if You Need Cash?There are several alternatives to a life settlement if you need immediate cash. You should investigate whether you can surrender your life insurance policy or if it has a cash value. You also may be able to get an accelerated death benefit. Check to see if there are any riders connected to your policy that can help.How Can I Protect Myself Against Fraud?To protect yourself against fraud, it is critical to make sure you are dealing with a legitimate company. You should ensure that any third party you are talking to is licensed and regulated by your state. Do not give out personal or financial information unless you are certain the company is legitimate.
After You Sell Your PolicyWhat 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.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.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.Please seek the advice of a qualified professional before making financial decisions.Last Modified: September 13, 2022
3 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- 360 Degrees of Financial Literacy. (n.d.). Life Insurance: Understand Your Choices. Retrieved from https://www.360financialliteracy.org/Topics/Spending-Saving/Insurance/Life-Insurance-Understand-Your-Choices
- Life Insurance Settlement Association. (n.d.). Do I Qualify for a Life Settlement? Retrieved from https://www.lisa.org/life-policy-owners/do-i-qualify/
- Life Insurance Settlement Association (n.d.). Frequently Asked Questions — Life Policy Owners. Retrieved from https://www.lisa.org/life-policy-owners/faq/
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