A senior life settlement is the sale of an unwanted, underperforming, or obsolete life insurance contract by an elderly individual to a third party for an amount less than the face value but in excess of the cash surrender value. Life settlements exist out of the need for seniors to attain access to the life insurance death benefit while still living. With a life settlement, the insured has a medically determined life expectancy of at least three years or longer.
Life insurance policies became a transferable property as a result of the Supreme Court case of Grigsby v. Russell in 1911. The ruling established that as a property, life insurance policies contained specific legal rights, including the right to name the policy beneficiary, change the beneficiary designation, assign the policy as collateral for a loan, borrow against the policy, or sell the policy to another party.This enabled policy holders to opt into a life settlement, which gave them an upfront benefit while they are still living. Life settlements are good options when a policy becomes unwanted, obsolete, or underperforms.

Before a life settlement is finalized, there are certain factors that decide whether or not a policy can be sold as well as the figures of the settlement itself. These factors start with the life insurance policy holder, such as age, life expectancy, and health status. Then, the factors dive into the financial parameters of the policy, including:

  • Future premium costs
  • Market rate return on similar investments
  • Financial status of issuing insurer
  • Structure of policy

The amount a policy seller receives in a life settlement depends on a number of factors. It begins with the face value of the policy, which can range from $100,000 to multi-million dollar policies. Other factors to be included in the final payout for the seller include:

  • Life expectancy of the seller
  • Amount of premiums that will have to be paid to keep the policy in force
  • Cash surrender value of the policy
  • Loans against the policy
  • Type of policy
  • Rating of the insurance carrier

There are a number of reasons why someone would opt into a life settlement. Here are some common, and not so common, reasons why someone would sell their life insurance policy:

  • The insurance policy is no longer needed or wanted by the policyholder.
  • The cost of living becomes too high for the seller.
  • Premium payments have become unaffordable.
  • The policyholder is considering surrendering the policy.
  • The policy is about to lapse.
  • There has been a change in estate planning needs.
  • The policyholder has seen a change in financial circumstances.
  • A change in life circumstance, such as divorce or death, has occurred.
  • A medical need or injury has occurred, and the seller cannot afford payments.

Life settlements aren’t the best option for everyone, and not everyone will qualify for one. The ideal candidates for a life settlement include seniors, age 65 and older, with multiple or underperforming life insurance policies who have:
  • A life expectancy of three to 15 years
  • A change in insurability since the policy was issued
  • A death benefit minimum of $100,000
  • A policy that has moved beyond the two-year contestability period.

If you’re not sure whether you would qualify for a life settlement, our qualification calculator can help determine if you would be a good candidate.

In nearly every scenario, the buyer and new owner of the policy will assume the financial requirements of the policy, including the ongoing premium payments required to keep the policy from lapsing.
While health status and life expectancy are important factors to consider when negotiating a life settlement, the policy seller does not have to take a medical exam. All settlement offers are based upon preexisting medical records obtained from the insured’s physician(s). All information is obtained in a HIPAA compliant process and remains fully confidential.
In most cases, a life insurance policy is owned by the policy’s designated insured person. However, in some cases, policies insuring a person are owned by others, including individuals, a trust, a corporation, or charitable organization. The short answer is that yes, life insurance policies qualify for life settlements even if they are owned by a person or entity that differs from the policy’s insured person. In most cases, an individual that owns a life insurance policy insured on someone else is a family member, spouse/domestic partner, or close friend.
No, a life settlement requires a life expectancy of at least three years in individuals typically older than 65 years old and does not involve a terminal illness. A viatical settlement involves insured individuals with terminal illnesses and a life expectancy of less than two years. While both involve selling life insurance policies prior to the death benefit being issued, they are typically utilized for different reasons. For example, a viatical settlement might be a good option for someone with a terminal illness and large medical bills. A life settlement may be chosen by a senior who no longer needs the life insurance policy or their standard living costs are unaffordable under their financial situation.

While a life settlement forfeits the death benefit of the beneficiary for a smaller payout, there are a number of reasons why someone would consider selling a life insurance policy. A life settlement may provide a better alternative than allowing an unneeded policy to lapse or be surrendered for its cash value. Life settlements are considered for a variety of reasons, including:

Personal Purposes:

  • To use the proceeds to purchase replacement coverage
  • Life insurance policy is no longer needed or not performing as intended
  • Financial obligations or unforeseen financial needs
  • Gifts to family members or contributions to charity
  • Unaffordable premium payments
  • Bankruptcy liquidation or Divorce

Estate Planning Purposes:

  • Estate taxes no longer an obligation
  • Liquefy inactive asset
  • Gift or other tax related expenses
  • Estate law changes

Business Purposes:

  • Buy/sell funding is no longer an obligation
  • Payout or change in deferred compensation
  • Elimination of the need for the Key Man
  • Change in financial needs

Life settlements are negotiations between seller and buyer. The transaction must be accepted by both parties and by no means is anyone required to accept an offer that they don’t like. In most scenarios, sellers would have a lawyer and/or a financial advisor present to make sure they are being heard and their wishes accounted for.
If the insured person on the life insurance policy dies within 15 days after receiving the cash proceeds from the life settlement, the contract will automatically cancel unless stated otherwise. The provider will need to pay the original policy owner or beneficiaries any proceeds it receives from the policy (minus any money the provider paid for the purchase of the policy and any life insurance premiums paid to keep it in-force).
Insurance companies will often allow a policy owner to divide the policy into multiple parts. While this scenario is typically seen with policies of at least $250,000 and higher, a policy owner may sell a part of his or her policy and retain a portion for him- or herself. Life Settlement Advisors can help guide you toward this service if you’re interested in dividing and selling only a portion of your life insurance policy.

The money paid in a life settlement or viatical settlement becomes the seller’s to do with what he or she chooses. In most cases, a policy seller has a specific need or use for the payout. Some use the proceeds to purchase long-term care insurance or a more appropriate performing life insurance policy. Others gift it to family members and/or charities or fund investments. Of course, some use the money to better their own quality of living for the remainder of their lives.

In most life settlement scenarios, proceeds are seen and treated as capital gains. The cash surrender value in excess of the basis in the policy is treated as ordinary income. In any scenario, a tax professional should be consulted for tax-related guidance before and after a life settlement is finalized.
Yes, life settlements are regulated on a state-by-state basis by the respective state’s Department of Insurance. As of right now, 45 states have requirements and regulations in place that govern how these settlements are handled.

As long as the policy has been in force for a minimum of two years, any of the following types of insurance qualify:

  • Convertible term
  • Universal life
  • Whole life
  • Survivorship or Joint Life
  • Adjustable
  • Key man or COLI (Corporate Owned Life Insurance)
  • Group life insurance (as long as it is convertible)