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What is a Life Settlement?

What is a Life Settlement?

A life settlement refers to the sale of an existing insurance policy to a third party for a one-time cash payment. Payment is more than the surrender value, but less than the actual death benefit. After the sale, the purchaser becomes the policy’s beneficiary and assumes payment of its premiums. By doing so, the buyer receives the death benefit when the insured dies.

How to Sell Your Life Insurance Policy?

You can sell your life insurance policy to a person or an entity other than the company that issued the policy. There are many life settlement companies buying life insurance policies.

When to Sell Your Life Insurance Policy?

The popular reasons for selling life insurance includes:

  • Retirement
  • Unaffordable premiums
  • Emergency use of cash
  • The original reason for buying a life insurance no longer exists

What are the Concerns about Selling Your Life Insurance Policy?

  • Anything that will affect the life settlement amount you receive
    • Your life expectancy
    • The type of policy you have (term policy or permanent policy)
    • Any unscrupulous life settlement buyers
  • Commission fees charged by the brokerage:

Sometimes it can be as high as 30% of the amount you get

  • Tax obligations
  • The public assistance benefits you are currently receiving, such as Medicaid
  • Privacy concerns:
    • You have to share your medical history over again to the policy buyer
  • Transparency and accountability of brokers

Who Buys Life Insurance Policies?

  • Institutional investors such as mutual funds, pension funds
    • Life settlement providers pack the policies and resell to institutional investors. They have to be licensed.

Do You Need an Advisor or Broker to sell your life insurance policy?

You don’t have to work with a broker, but it is recommended that you use a broker to negotiate with a buyer. A good advisor or broker who knows many life settlement providers is usually able to negotiate a competitive value and bidding process for you. However, if you choose to execute the deal that they facilitate for you, you have to pay a commission fee. The commission fee can be high.

How much can you expect to get paid for your life insurance policy?

As the policyholder, you may be able to receive 10% to 35% of the amount that would be paid out when you die. A number of factors will influence the cash value of your life insurance policy, including:

  • The death benefit value of the policy
  • Your age
  • The cost and the remaining time you’ll pay premiums

We can’t provide a definitive answer to that question without specific information from the insured. Typically, you can expect to receive about 20%-25% of your policy benefit upfront, in cash. The amount of money the seller gets should be more than the cash surrender value of the policy and will be less than the death benefit value of the policy.

What are the benefits of selling your life insurance policy?

Many elderly Americans discover that their personal or financial circumstances have changed over the years. The original reason for buying a life insurance policy no longer exists. A life insurance settlement can provide immediate liquidity for an unwanted or out-of-date policy.

What is the process of selling your life insurance policy?

Selling life insurance is part of a regulated industry. Even though you could try to find a buyer on your own, it is recommended you work with professionals. Consider working with:

  • A professional advisor
  • A life settlement broker who can represent you, provide you with counsel, and search settlement providers for buyers on your behalf
  • A life settlement provider

Once you have a potential buyer, you’ll need to have the following information:

  • The type of life insurance policy you have—if you have term life insurance, you may also want to find out if you can convert it to a universal life or whole life policy
  • Personal information such as medical history and health information
  • The cash surrender value of the policy
  • How many years premiums will have to be paid for

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