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It is an interesting trend in the life insurance industry. But before we dig deeper into why this is so attractive to American seniors, let’s take a closer look at what a life settlement is and some of the terms used with this type of transaction.
The simple definition is “a life settlement is the sale of a life insurance policy to an investor for cash.” The amount a life insurance policy is sold for in this type of arrangement totals more than the cash surrender value of the policy but is less than what the death benefit is worth. Life settlements are a frequent solution for individuals who need to free up liquidity to assist with retirement costs, long-term care, or other costs. The ownership of the life insurance policy shifts to the buyer in a life settlement and that includes everything from the payment of premiums to the death benefit. It also means that the beneficiaries of the original policyholder will not receive anything when the formerly insured individual dies. The attraction here is that when a life insurance policy is sold to an investor, the original policyholder receives a mostly tax-free lump payment of cash.
There are a few requirements the original policyholder must meet to be eligible to flip their life insurance policy into cash through the life settlement process. Individuals who meet the following guidelines will have greater success at selling their life insurance policies.
The majority of individuals who sell their life insurance either suffer from a serious medical issue or are over the age of 65.
There are a variety of different types of life insurance policies. Typically, those that are universal, convertible terms, and whole are eligible.
For the most part, policies that are sold have a face value of no less than $100,000.
Here are a few of the terms that are frequently referenced in the selling of a life insurance policy. The definitions are intended to help you to better understand the terminology.
This is the transfer of a life insurance policy to a third-party investor from a policyholder. The transfer includes a cash payout that is more than the policy cash surrender amount but less than the death benefit total.
Cash Surrender Value
If a policyholder cancels their life insurance policy, the insured will receive an amount of cash. That amount, called the cash surrender value, is the calculation of the policy’s cash value less the fees that result from the cancellation.
After the policyholder dies, the cash distributed to the beneficiary or beneficiaries is the death benefit.
This is the specific type of life settlement created for terminally or chronically ill policyholders.
There are several reasons individuals will seek a life settlement. The majority of them revolve around the need for money by the policyholder that is greater than that for the beneficiaries once the insured passes away. Here is a look at some of the most common reasons life settlements have been the right solution for many.
The Premiums Are Too Expensive
If keeping up on the policy premiums is so difficult that the policy may lapse due to non-payment, then a life settlement could be a good alternative. Although there is a possibility of receiving a portion of the cash surrender value by letting the policy lapse, it won’t be nearly as much as is possible from selling the policy in a life settlement arrangement.
The Policy Is No Longer Required
Circumstances change and there are times when policyholders will no longer have a spouse or children depending on the death benefit. If there are no longer beneficiaries, cashing in with a life settlement is a good way to deal with that situation.
The Term Policy Is About To Expire
Term policies normally have no cash value when they expire and are expensive to replace. It is possible to convert that term policy into a permanent life insurance policy and then use that for a life settlement sale.
To Supplement Retirement Income
Sadly, comfortable retirement is only possible with enough savings. A life settlement can be used to supplement retirement income and reduce the stress associated with living on a tight budget.
To Cover Unexpected Costs
It happens. Unexpected costs can come out of the left field and during retirement, that can be costly. By selling off a life insurance policy, the cash payment will assist with covering some or all of those unexpected expenses.
There are some advantages and disadvantages to selling a life insurance policy. Here is a quick review of what those are.
– The policyholder can receive a lump sum cash payment that is greater than the surrender cash value immediately
– Premium payments are no longer required once the policy is sold
– Selling the policy permits costs like long-term care or other medical issues to be covered
– A life settlement provides a good supplement to retirement income
– When the original policyholder dies, there will be no benefits for the beneficiaries
– Eligibility for Medicaid may be lost
– The proceeds from the sale of the policy may be taxable
– The payout may not cover anticipated costs
There are three different life settlement options. The most common of them are as follows.
Traditional Life Settlement
This is the most common method used to sell a life insurance policy. To be eligible for a traditional life settlement, the policyholder must be over 65 years of age, with a permanent life insurance policy, or a convertible term policy, that has a value of no less than $100,000.
Settlements involving chronically or terminally ill policyholders are called a vatical settlement. These settlements pay more to the policyholder than a traditional life settlement based on the fact that the life expectancy of the insured is less.
Retained Death Benefit
This type of life settlement permits the policyholder to keep a portion of the death benefit. As this means the full policy is not being sold, the settlement will be less.
There are many reasons and benefits to selling a life insurance policy to a third-party investor. Depending on the circumstances, it may be a good solution if cash is tight or premiums are too high or there are no longer beneficiaries to receive the proceeds of the policy. The information above is intended to assist individuals who are considering a life settlement with the information they need to make an informed decision. A life settlement is no for everyone.