In general, a life settlement is the sale of a life insurance policy on the life of a person that is usually age 65 or older that has a medical condition limiting their life expectancy. Another definition is the sale of a life insurance policy for an amount greater than the policy’s current cash surrender value.
A life settlement is an extremely valuable tool that offers more flexibility to the policyholder. Rather than continuing to pay premiums that may be unaffordable or simply lapsing an unwanted or unneeded life insurance policy, the policy may be sold to an investor or investment fund. In many cases, a life settlement can provide considerable value as the sale of the life insurance policy can generate substantial cash to the policyholder and the proceeds of a life settlement can be used at the policyholder’s discretion. Prior to the life insurance settlement market, the owner of an unneeded or unwanted life insurance policy had only two options, lapse the policy or in the case of whole life insurance, surrender the policy for its cash surrender value.
Life Settlement Basics: How Does a Life Settlement Work?
In order to determine if your life insurance policy has potential value above and beyond the cash surrender value a policy appraisal must be done. To get a life settlement policy appraisal, you must submit an application to a life settlement broker or company. This application will provide your current policy details including the type of policy, current premiums, face amount and will require an illustration of future premiums. Additionally, the application will ask about your medical history with specific details including any medications you may be taking.
Once your application is submitted, it is reviewed and if specific qualifications are met (see below), your complete medical records will be ordered for review. Once your medical records have been obtained and reviewed by a life settlement underwriter, a life expectancy will be obtained. This information provides the buyer of your policy an idea of your life expectancy based on your specific medical conditions outlined by your treating physicians.
Once your life expectancy is obtained, it is included in a financial model that will take into account the current and future premiums of your policy and what the rate of return may be on the “investment” in your life insurance contract. If the return on investment (ROI) of your policy is satisfactory, a cash offer will be made for your policy. At that point, you can either choose to accept the offer and sell your life insurance policy or decline the offer and maintain your coverage.
Does Your Life Insurance Policy Qualify for a Life Settlement?
In order for a life insurance policy to be saleable in the life settlement or secondary marketplace, a few criteria must be met. Following are some of the more important qualifications for a policy to be appraised and eventually sold in the secondary market:
- The policy must be inforce for a least 2 years. In other words, the contestibility period (initial 2 policy years) must have expired.
- In most cases, the insured must be age 65 or older and the older the better (for payouts).
- Life expectancy of the insured must be 12 years or less in mist cases.
- Policies can be term life or permanent life.
- If the policy is term, the policy must be convertible to permanent insurance.
- Policy face amounts should be $100,000 or greater (the higher the face amount the better in most cases).
- Premiums for the policy should be 4% of the face amount or less (the lower the better).
Life settlements offer policyholders a tremendous opportunity to benefit from no longer wanted or needed life insurance coverage. If you meet the requirements above and have a life insurance contract that is underperforming, the premiums have become prohibitive or you simply no longer need the coverage, you should definitely work with a life settlement expert to get your policy appraised. For some specific examples of how we have helped client with life settlements see, I No Longer Needed My Life Insurance Policy So I Sold it for $43,400 or I Could No Longer Afford My Life Insurance and My Agent Got Me $58,000.
For more details on life insurance settlements see, Why Should I Consider A Life Settlement and for agents Life Settlements: Don’t Neglect Your Fiduciary Duty To Your Clients.