Life settlements, also known as senior settlements, offer older Americans the opportunity to sell their existing life insurance policies for cash. This process involves transferring the ownership of the policy to a third party, who becomes the new beneficiary. In return, the policyholder receives a lump sum payment. If you’re considering a life settlement or have been approached to sell your policy, it’s important to understand the process, benefits, and key factors to consider.
In this comprehensive guide, we will delve into the details of life settlements, including how they work, reasons to choose them, and the differences between life settlements and viatical settlements. We’ll also discuss how to protect yourself during the life settlement process and provide answers to essential questions you may have.
What Is a Life Settlement?
A life settlement refers to the sale of an existing life insurance policy to a third party for a one-time cash payment. Instead of surrendering the policy for its cash value or allowing it to lapse, policyholders have the option to sell it to a buyer who assumes the responsibility of paying the premiums. In exchange, the buyer becomes the new beneficiary and will receive the death benefit when the insured individual passes away.
Life settlements are regulated by state insurance commissioners, with variable life settlements falling under the jurisdiction of the Securities and Exchange Commission (SEC) and FINRA. While most states regulate life settlements, not all transactions are subject to regulation. Therefore, it’s crucial to research potential buyers to ensure they are licensed and regulated.
The purchasers of life settlements, often referred to as life settlement companies or providers, can either hold the policies until maturity or sell them to hedge funds or other investors. The amount offered for a policy depends on various factors such as the policyholder’s age, health condition, and the terms and conditions of the policy.
How Life Settlements Work
When a policyholder decides to pursue a life settlement, they sell their life insurance policy to a buyer for a lump sum payment. The buyer then assumes the responsibility of paying the premiums and becomes the new beneficiary. Upon the death of the insured individual, the buyer receives the death benefit.
Life settlements provide policyholders with an alternative to surrendering their policies for their cash value or allowing them to lapse. By selling the policy, policyholders can receive a higher amount than the cash surrender value but less than the net death benefit.
It’s important to note that life settlements create a secondary market for life insurance policies. This secondary market has been established through various judicial rulings, including the landmark 1911 U.S. Supreme Court case of Grigsby v. Russell. In this case, the court affirmed that life insurance policies can be transferred by the owner, just like other forms of property.
Reasons to Choose a Life Settlement
There are several reasons why individuals choose to pursue a life settlement for their life insurance policies:
Many older individuals find themselves in need of additional funds for their retirement. Life settlements can provide a lump sum payment that can be used to supplement retirement income. This cash infusion can alleviate financial burdens and help individuals enjoy their retirement years more comfortably.
As individuals age, life insurance premiums can become increasingly expensive, making it difficult for policyholders to continue making the payments. Rather than allowing the policy to lapse or surrendering it for a lower cash value, a life settlement can provide a higher payout that can be used to cover other expenses.
Emergencies and Financial Hardships
Life settlements can also be a viable option in times of financial emergencies or hardships. Unexpected events, such as the death or illness of a family member, can place a significant financial burden on individuals. Selling a life insurance policy through a life settlement can provide the necessary funds to cover these expenses.
Policy No Longer Needed
There may come a time when the reasons for having a life insurance policy no longer exist. For example, if the policyholder’s dependents are financially independent and no longer rely on the policy for support, selling the policy through a life settlement can be a sensible choice.
Key Individual Insurance Policies
Companies often hold life insurance policies on their executives, known as key individual insurance policies. If an executive leaves the company, the policy may no longer be necessary. By pursuing a life settlement, the company can cash out on the policy and recoup some of the investment.
Life Settlements vs. Viatical Settlements
Life settlements and viatical settlements are two related concepts in the secondary market for life insurance policies. While they share similarities, there are key differences between the two:
Life settlements involve the sale of life insurance policies by individuals who are generally older and have no known life-threatening illnesses. The policyholder sells the policy to a third-party buyer, who becomes the new beneficiary and assumes the responsibility of paying the premiums. The buyer receives the death benefit upon the insured individual’s death.
Viatical settlements, on the other hand, involve individuals who have terminal illnesses and are in need of immediate funds. In a viatical settlement, the policyholder sells their life insurance policy to a buyer, who assumes the responsibility of paying the premiums. The buyer receives the death benefit when the insured individual passes away.
Viatical settlements are generally riskier for investors, as the timing of the insured individual’s death is uncertain. If the insured person lives longer than expected, the return on investment for the buyer may decrease.
Protecting Yourself During the Life Settlement Process
If you decide to pursue a life settlement, it’s essential to take steps to protect yourself throughout the process. Here are some key considerations:
Research the Buyer
Before entering into a life settlement agreement, thoroughly research the buyer. Check if they are regulated and required to be licensed in your state. You can contact your state insurance commissioner for information on the buyer’s licensing status and any complaints filed against them. If you’re working with a registered financial professional, use FINRA BrokerCheck to learn more about their background and disciplinary history.
Understand the Policy’s Fate
Ask the life settlement company what they intend to do with the policy after purchase. Will they hold it themselves, sell it individually, or package it with other policies and sell interests to other investors? Understanding the future of your policy can help you make an informed decision.
Review the application process and ensure that the company has procedures in place to protect the confidentiality of your personal information. Ask who will have access to your health and other sensitive information and whether it will be shared with third parties. State regulations often govern the handling of confidential information, so familiarize yourself with the applicable regulations in your state.
Fair Price Evaluation
Determining a fair price for your life insurance policy can be challenging. To ensure you receive a competitive offer, shop around and contact multiple life settlement companies or licensed brokers. They can help you assess the value of your policy and obtain the best possible price. Be cautious of individuals or companies pressuring you to accept an offer quickly without allowing you sufficient time to evaluate your options.
Transaction Costs and Compensation
Life settlements can involve high transaction costs, including hefty commissions for those involved in the process. Before proceeding with a life settlement, understand how the broker or other parties involved are compensated. Evaluate whether the costs associated with the transaction outweigh the benefits of selling your policy.
Changing Your Mind
Some states have laws that allow policyholders to change their minds within a certain timeframe after accepting a life settlement offer. Familiarize yourself with the laws in your state to understand your rights and options if you have second thoughts about the transaction.
Frequently Asked Questions
Q: How does a life settlement differ from surrendering a life insurance policy?
A: Surrendering a life insurance policy involves canceling the policy and receiving its cash surrender value from the insurance company. On the other hand, a life settlement allows you to sell your policy to a third party for a lump sum payment, which is typically higher than the cash surrender value.
Q: Can I buy a new life insurance policy after selling my existing one through a life settlement?
A: Yes, it is possible to buy a new life insurance policy after selling your existing one through a life settlement. However, it’s important to consider factors such as your age and health, as they can affect the availability and cost of a new policy.
Q: Will selling my life insurance policy through a life settlement affect my eligibility for public assistance programs?
A: The lump sum payment received from a life settlement may be taxable, depending on your circumstances. It could also impact your eligibility for state or federal public assistance programs such as Medicaid. It’s advisable to consult with a financial advisor or tax professional to understand the potential implications.
Q: How can I ensure that I am getting a fair price for my life insurance policy?
A: To ensure a fair price, it’s crucial to shop around and obtain multiple offers from reputable life settlement companies or licensed brokers. Comparing offers can help you assess the value of your policy and ensure you receive a competitive price.
Q: Can I change my mind after accepting a life settlement offer?
A: Some states have laws that allow policyholders to change their minds within a specified timeframe after accepting a life settlement offer. Familiarize yourself with the laws in your state to understand your rights and options if you wish to reconsider the transaction.
Life settlements offer older individuals the opportunity to sell their life insurance policies for a lump sum payment. This can be an attractive option for those in need of additional funds for retirement, facing unaffordable premiums, or experiencing financial emergencies. By understanding the life settlement process, protecting yourself during the transaction, and considering the factors involved, you can make an informed decision that aligns with your financial goals.
Remember to conduct thorough research, consult with professionals, and carefully evaluate offers to ensure you receive a fair price for your policy. Life settlements can provide a valuable financial solution for policyholders looking to unlock the value of their life insurance policies and secure their financial future.