Did you know you can sell all or a portion of a life insurance policy, even term insurance?
(6 minute read)
Do you have a life insurance policy that you no longer need or want? Are you trying to simplify your finances, or are you looking for a way to get cash quickly? If so, it might be time to consider a life insurance settlement. What are life insurance settlements, you ask.
In the simplest of terms, life settlements entail selling a life insurance policy for a cash sum. However, as with any financial decision, it’s not quite that straightforward. There are lots of different factors to take into account when evaluating whether a life settlement is right for you. In this blog, we discuss the ins and outs of life settlements and work to answer some of the questions you may have.
What Is a Life Insurance Settlement?
The most basic life settlement definition is the legal sale of an existing life insurance policy to a third-party for a one time cash sum. The cash payment will be more than the cash-surrender value (the amount the insurance company would pay you if you canceled the policy), and less than the actual death benefit.
After the sale of the policy, the purchaser becomes the policy’s beneficiary and assumes the responsibility of paying the remaining premiums. In turn, they will receive the death benefit when the insured party dies. You can also sell a portion of your policy if you aren’t looking to sell the entire thing. We will discuss this a little more, later.
How Does a Life Settlement Work?
If the definition still has you confused, we’ll break down the process in a bit more detail. Let’s suppose you have a life insurance policy with a death benefit of $100,000. You decide that you no longer need or want that policy. The next step for you would be to contact either your financial advisor or one of your local life settlement companies, including Life Settlement Advisors.
From there you will go through a process similar to the following:
- Find out if you qualify for a life settlement
- Complete an application
- Wait for your application to be reviewed
- Receive an offer
- Sell your policy
While the majority of the process is pretty straightforward, the most confusing part can be determining whether or not you qualify for a life settlement. Let’s go over those criteria.
Who Qualifies for a Life Settlement?
Qualification for a life settlement considers many factors. They include age, life expectancy, premium amount, and type and size of the policy. For example, the ideal life settlement client is a male or female who is in their mid-70’s or older who has undergone a change in health since the issue date of the policy.
- Age: Typically to qualify you must be over 65 years old. In some very specific circumstances, someone younger may qualify.
- Life expectancy: From the perspective of the buyer, a candidate with a life expectancy around 15 years or fewer is ideal. Life expectancy is calculated by taking into account the last three years of the medical records, age, and current health issues.
- Premium amount: While there are no hard and fast rules for premium amounts, the lower the monthly premium, the more appealing and valuable your policy is.
- Policy type: The most common type of policy that qualifies for a life settlement is universal life. However, convertible term, whole life, and second-to-die policies can all qualify as well. To qualify, a policy generally must also be at least 2 years old.
- Policy size: The death benefit amount has to be worth at least $100,000 to qualify.
For more on qualifications, check out our life settlement calculator.
How Much Is a Life Insurance Settlement?
As we mentioned earlier, the upfront lump sum of cash will vary from case to case depending on the assessed value of the policy. With that in mind however, on average life settlements pay (or cost if you are the one buying the policy) about 4x – 7x the amount of the cash surrender of a policy.
Is a Life Settlement a Good Idea?
There is no blanket answer to this question since everyone’s financial and life circumstances are different. That’s why it’s so important to talk to an advisor to review your specific situation. That being said however, there are definitely some common situations in which a life settlement makes sense for you.
If you find that your monthly premiums are getting too costly for your liking, or potentially even unaffordable, you might consider selling your policy. Most people think their only options are to either lapse their policy or surrender it, but with a life settlement, you can actually sell the policy for more than the cash surrender amount.
Time Sensitive Need for Money
Maybe you find yourself in a situation where you need to liquidate your assets as soon as possible. Common instances include medical bills or unforeseen expenses. If that is the case for you, by selling your life insurance policy and accepting a lump sum of cash, you will have access to money you can spend immediately.
Change of Circumstances
The thing about life insurance policies is that they basically stay with you for life. That means the longer you own them, the more your life circumstances might change. Maybe when you bought the policy you had a spouse or children who would need financial assistance in the case of your untimely passing. As you get older, these individuals may no longer be financially dependent on you. Maybe as you age, you decide the need for cash now outweighs the death benefit of your policy. Whatever your reasoning is, selling your life insurance policy because it doesn’t fit your needs anymore can definitely make sense.
Downsize Your Policy
One of the neat things about life settlements is that you can simply sell a portion of your policy. That means that the buyer will pay for all of your monthly premiums and receive a percentage of the death benefit. Similar to the previous paragraph, if your life circumstances have changed and you decide you no longer need as big of a policy, this option might be the right fit for you.
From the Perspective of Life Insurance Settlement Companies and Providers
So far, we have mostly discussed what life settlements look like for the person selling the policy. Let’s shift our focus now to the buying party. Generally speaking, there are two types of people involved in the buying process, life settlement companies (Brokers) and life settlement providers.
Life settlement companies (like us at LSA), also known as brokers or advisors, operate on behalf of the policyholder. A broker will work with the owner to walk them through the process, shop the policy around, and ultimately secure and finalize an offer agreement. Life settlement advisors generally get a commission from the sale of the policy (similar to a real estate agent). Life settlement companies can purchase your policy or help you find someone to purchase them.
Life settlement providers are direct buyers. They will purchase the policy from the owner, either as their own investment or on behalf of a client or institution.
Now that we have established the parties we are talking about, let’s look at some common questions you might ask if you were going to buy a policy.
Are Life Settlements a Good Investment?
Generally speaking, life settlements are a low risk investment. That is to say, there is a guaranteed pay out. When the insured party dies, you will receive the death benefit. How well you assess the value of the policy before you buy it is what really dictates whether you have made a good investment however. Premiums, payout, and life expectancy all come into play when evaluating what a policy might be worth.
Can I Buy a Life Settlement Policy?
So now that you know all about life settlements and buying insurance policies, you may find yourself interested in potentially acquiring some as a way to diversify your portfolio. The best way to go about this is to work with either a licensed broker or financial advisor. That way, you can ensure you are staying within the confines of the law. And by using someone with experience in the field, you can help to minimize the risk on your end.
Everyone Wants to Know…Are Life Settlements Safe?
As far as financial decisions go, life settlements are very safe. The most important part of mitigating your risk is to work with an advisor or company you know and trust. Whether you are buying or selling, there is a fair price for any qualifying policy. Knowing what it is and how to calculate it will help achieve the best possible settlement for both parties. That’s where we at Life Settlement Advisors LLC come in.
At LSA, we have more than 50 years of combined experience advocating on behalf of our clients. We want to help you find the best solutions for your future, whether that means assisting with the sale of a policy or continuing to educate you about your options. To learn more, contact us today!
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home, or any other valuable asset that will create immediate cash. Contact us today to learn more.
Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors