Are Life Settlements Worth It?

Life settlement companies provide a valuable lifeline for individuals to recoup tangible value from a life insurance policy they no longer want or need—or simply can’t afford to keep paying premiums toward. Before you open a new tab and start searching for “life settlement broker near me,” though, it’s important to understand what a life settlement entails, and whether it will be worth it to sell your policy.

What Can You Do With an Unwanted or Unneeded Life Insurance Policy?

If you’re looking to offload a life insurance policy that no longer fits your needs or budget, you have two main options: surrendering the policy or pursuing a life settlement (if you qualify). Let’s take a closer look at what each of these entails.

What Does It Mean to Surrender a Policy?

While surrendering a policy—by reaching out to your insurer and telling them you no longer want the policy—you receive a moderate payout for the cash surrender value of your policy. As noted by Investopedia, the cash surrender value equals “the total contributions and accumulated earnings, minus prior withdrawals and outstanding loans.” How much is a policy’s cash surrender value? Typically, it’s not a whole lot: around 30% of the premiums you’ve paid (excluding the first year’s premiums), or $460 for every $100,000 in value.

Is Surrendering a Policy a Good Idea?

Surrendering a policy can provide quick cash in exchange for a policy you don’t want or need, but it’s almost certainly not your best option. The biggest drawback is that surrendering a policy simply doesn’t return enough value in exchange for the policy—especially when compared with life settlements. Your financial advisor can help you determine these potential values, to make sure that a life settlement is your best option.

How Does a Life Settlement Work?

This option is almost always better than simply surrendering your policy or letting it lapse. Selling your unwanted or unneeded policy means working with a life settlement broker, who will help you understand your options and engage with various life settlement providers on your behalf. 

For a commission, they take on the role of being your advocate, making sure you get the best return possible. In almost every case, the amount you can receive from a settlement will exceed the policy’s surrender value (or what you would receive if you took zero action)—even accounting for the broker’s commission, which could be as high as 30% of the settlement amount, according to the U.S. Financial Industry Regulatory Authority (FINRA).

Who Can Get a Life Settlement?

One caveat or drawback to life settlements is that not everyone will qualify; working with an advisor or life settlement broker is the best way to determine whether you currently qualify. If not, they’ll help you either understand how you might eventually qualify, or what other options are available to you. The qualification criteria for a life settlement are based on factors like…

  • Policyholder’s Age: You typically will need to be at least 65 years old to qualify, though exceptions can be made for some chronic medical conditions. Additionally, life settlement candidates should have a life expectancy of 15 years or less.
  • Policy Type: Many types of life insurance policies are eligible for life settlements, including whole life, universal life, joint life or second-to-die, variable universal life, indexed universal life, and some term life policies (those with a convertibility option).
  • Policy Premiums: The lower the premiums, the more valuable your policy is to a life settlement company or investor. Many prefer to purchase policies where the premiums equal less than 5% of the policy’s face value.
  • Death Benefit: To qualify for a life settlement, your policy’s minimum face value or death benefit must be worth at least $100,000.

You can learn more about the qualification criteria here, or visit this page to see if you qualify.

How Much Can You Get in a Life Settlement?

While everyone’s situation is different and several factors impact how much you might receive by selling your unwanted or unneeded life insurance policy, the average payout is around 20% of the policy’s face value or death benefit. In exchange for the lump sum you receive, the life settlement company takes over paying the policy premiums and eventually receives the death benefit. 

Of course, working with a broker—who will serve as your advocate throughout the process and help you find the best offer or opportunity—will incur a modest commission. There are multiple ways a broker might structure their fees, such as a specific percentage of the face value of the policy, or a specific percentage of the settlement amount.

How Are Life Settlements Calculated?

Most life settlement brokers will provide a basic life settlement calculator you can use on their website to get an idea of what a life settlement might look like for you. For example, Life Settlement Advisors provides a handy, easy-to-use calculator to check your eligibility and get the ball rolling toward a settlement. Based on the details you input, our team will be in touch to further explore your needs and present you with options.

Looking To Sell a Life Insurance Policy? Let’s Talk

Our team at Life Settlement Advisors works with life settlement companies and policyholders like you every day. We know the prospect can be stressful, but we’re well-versed in the industry and will make each step of the process clear and easy. Start the process by seeing if you qualify.

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.