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.
- 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.
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:
- 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
- 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
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.
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
- Key man or COLI (Corporate Owned Life Insurance)
- Group life insurance (as long as it is convertible)