Life settlements can be a good choice for older people who want to turn their life insurance policy into cash right away. A life settlement is when an insurance policy that is already in place is sold for a lump sum of money. It lets policyholders get the fair market value of their life insurance by selling their policies and getting more money than the cash surrender value.
In theory, a life settlement contract lets you sell your insurance policy to a third party for less than what it's worth. This is possible because a life insurance policy is property that can be sold legally, just like a car, house, stocks, or bonds. With a life settlement, you can get money now from an asset that is usually thought to be worth something only when you die. Life settlement transactions usually involve large-face-value life insurance policies, "key-person" coverage or corporate-owned life insurance, or policies that provide extra coverage that is no longer needed.
How a life settlement works is as follows: When a life settlement company buys your life insurance policy, it pays you a portion of the policy's face value. Then, when the policy comes due, the life settlement company takes over as the new beneficiary. So, it has to pay all future premiums and gets the whole death benefit when the insured person dies.
A Growing Business
With a life settlement, you can sell your insurance policy for a lot of money while you are still alive. This gets rid of the need to pay premiums, adjusts to the changing needs of your dependents, and gives you more financial freedom.
A life settlement can also be used to give money to a good cause. In a planned giving programme, life settlements can be used as part of complex estate and tax planning strategies. But in simple terms, this is how it works: Through a life settlement, you give your life insurance policy to a charity. The charity then sells the policy right away for a lump sum of cash.
Life settlements are a good choice for seniors who don't want or need their insurance policies because of these and other benefits. Because of this, the life settlement industry has grown a lot in the last few years. Conning & Co. Research found that seniors owned about $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors who were eligible for life settlements. Since 2003, more and more of these senior clients who were eligible to sell their policies have done so. This has helped the market grow.
In separate research, the business school at the University of Pennsylvania found that life settlement companies paid about $340 million to people for their underperforming life insurance policies. This was an option that people did not have just a few years ago. The research says, "We estimate that life settlements alone generate surplus benefits of more than $240 million per year for life insurance policyholders who have chosen to sell their policies at a competitive rate."
Your Policy for Sale
You might be a good candidate if you are ready to retire, have paid off your mortgage and other debts, and don't need life insurance anymore. How much you get depends on your age, your health, the death benefit, and how long your policy has been in effect.
People over 65 who have a calculated life expectancy of more than two years but less than ten years and who may have had a change in their health that caused their insurance premiums to go up have the best chance of selling their policies. Almost any type of policy can be sold, from universal life to whole life to convertible term contracts, depending on how long the policy holder is expected to live. But most policies must have a value of at least $100,000.
Whether or not you sell your life insurance policy is a decision that only you can make. You might want to think about a life settlement if any of the following are true:
- You are going to go broke.
- You want to set up a plan for giving money to charity or to family.
- You need more money to pay for medical and long-term care costs.
- The way you are working has changed.
- Your insurance premiums are too high, and you can't pay for them anymore.
Meeting with a Consultant
The American Council of Life Insurers, a trade group based in Washington, D.C., says that before you decide to sell your insurance policy, you should look at all of your options. Talk to a financial advisor who knows about life settlements instead of going it alone. This could be an accountant/CPA, a lawyer (especially one who specialises in elder law), a financial/estate planner, a certified senior advisor, or a person who works for a charitable trust.
You could also work with a broker, but your financial advisor can also send your case directly to the life settlement company. But brokers usually do the best job of getting fair market value for policies in an industry where market value for life insurance policies may not be well known. They send life settlement cases and bids to more than one company, which can help high bidders negotiate.
Keep in mind that life settlement companies are basically investors who pay for a lot of transactions each year. They keep the policies they buy as part of their portfolios instead of selling them to other investors. They also have compliance departments that carefully look over transactions and institutional funds from a big bank.
Steps to Making a Life Settlement
Want to know what happens during a life settlement? Here are the steps that usually happen during a transaction:
Step 1: You talk to a professional and decide to sell your policy.
Step 2: Choose a broker with your advisor.
Step 3: The broker sends your case to different companies, with your permission to share your medical information.
Step 4: Providers send offers to the broker if your policy is eligible for a life settlement.
- Step 5: You accept an offer and then fill out the closing package for the company.
Step 6: The life settlement company puts the cash payment into an escrow account and sends the insurance company a change of ownership form.
- Step 7: The money is sent to you once the paperwork is checked.
