Life insurance policies can offer much needed protection for a person and their family, which is why so many people purchase them. But as we age, our responsibilities and priorities change. Many people eventually find that the reasons they once needed a life insurance policy are no longer relevant. For instance, perhaps their children are no longer financially dependent. For others, making the monthly payments may be a challenge, or perhaps they would like to use the money invested in their policy.
This is where life settlement companies come in. Life settlements are a way of selling your life insurance policy to a third party, known as a life settlement provider. If you qualify as a policyholder, you can receive a lump sum payment to spend on whatever you choose. A good life settlement company, like LSA, can help you understand your options for selling your life insurance policy. Having help with this complex process will get you the most out of your investment.
In this article we’ll answer commonly asked questions about life settlements and life settlement providers, including:
- How does a life insurance settlement work?
- What is the difference between a life settlement provider and a life settlement broker?
- Who buys life insurance policies from people?
- What is the average life settlement commission?
- How much can you sell your life insurance policy for?
What Is a Life Settlement Provider?
Life settlement providers are the individuals or companies that buy an insurance policy the original policy owner is selling. A life settlement provider is the one doing the life insurance buyout. When a provider decides to buy a life insurance policy, they will pay the policyholder an amount of money that’s less than the death benefit but considerably more than the surrender value of the policy.
Here’s an example to make this clearer. Let’s say you have a life insurance policy worth $100,000. If you choose to surrender your policy, meaning you tell your insurance company you want to cash out your account, the average cash surrender value for your $100,000 policy is $460. Conversely, selling this same policy through a life settlement earns an average of 22% of the policy’s death benefit, meaning you might expect a $22,000 settlement.
Once a life settlement provider has purchased your policy, you will no longer be eligible for the policy’s death benefits. The provider takes ownership of the policy, and will continue to pay the monthly premium. You are freed from making this monthly payment, and receive money back from your policy that you are able to use during your lifetime, but there will not be a payment to your beneficiaries after your death. Instead you get to use the funds for your needs now.
What Is a Life Settlement Broker?
A life settlement broker is the person or company that finds providers that want to buy your policy. This is the person who will guide you through the process, answer any of your questions, and help you choose the best provider offer. An experienced life settlement broker, like those at LSA, will perform a variety of tasks, such as:
- Help you decide if you meet the criteria to sell your policy
- Guide you to understand how much the policy is worth
- Locate providers interested in purchasing your policy
- Present provider offers on your policy to you
- Fill out paperwork needed to complete the sale
- Follow up to make sure you receive your payment and have all your questions answered
What Is the Difference Between a Broker and a Provider?
Life settlement providers are the ones who purchase your life insurance policy, while brokers are the ones who help you navigate the process.
In a Life Settlement Contract, Who Does the Life Settlement Broker Represent?
A life settlement broker represents you, the person selling your life insurance policy. A useful analogy to help you keep things straight is to think about it like a real estate transaction. If you were selling a house instead of a life insurance policy, the broker would be your real estate agent and the provider would be the new family buying your home.
How Much Do Life Settlement Brokers Charge?
The exact amount a broker charges depends on who you choose to work with and the details of your policy sale. To give a general idea, here are a two different ways this fee is often calculated:
- Percentage of Face Value | Broker fee is calculated based on the total value of the policy. So if you are selling a $100,000 policy for a 6% commission, the broker fee would be $6,000.
- Percentage of Value Created | Broker fee is calculated based on the amount of money being paid for the life settlement. So if you are selling a $100,000 policy for $22,000 on a 30% commission, the broker fee would be $6,600.
The exact amount you will pay to your broker depends on your situation, so be sure to check your contract or ask for more information. A good life settlement broker, like Life Settlement Advisors, will also be able to help you better understand costs before you begin,
Do Companies Buy Life Insurance Policies?
Yes, there are companies that buy life insurance policies, but only certain types, such as whole life and universal policies. Term life insurance policies can be more challenging, there are companies that buy term life insurance policies, if they can be converted into universal or whole life policies. It can get a little tricky because often the companies that you might think about as buying a policy are actually life settlement brokers—companies like Life Settlement Advisors that help you navigate the process of selling your policy. But a life settlement broker is not the company or individual who is actually purchasing your policy; they are the ones representing you as you sell.
A life settlement provider is the actual buyer of the policy. They purchase the life insurance policy from you, take over the monthly payments, and receive the death benefit.
How Does a Life Settlement Company Make Money?
Let’s explore this question from the standpoint of the two parties involved in the sale of your life insurance policy.
- Life settlement brokers make money on commission. When you agree to work with a broker, you will sign a contract that agrees to pay them a certain percentage of the money you receive when you sell.
- Life settlement providers have the potential to make money as an investment with inherent risk. These companies or individuals pay you a set amount of money to purchase your insurance policy and continue to make monthly premium payments until you pass away. They then receive the full death benefit of the policy from your insurance company. Providers make money if the full amount they get is more than what they paid you plus the monthly premium they paid.
Here’s an example to help illustrate how it works. Let’s say Mary has a policy with a $100,000 death benefit and a life settlement provider pays her $22,000 for it when she is 70 years old. She made monthly payments of $50, which is now paid by the provider instead. If Mary lives to 90 years old, that will mean the provider makes 20 years (240 months) of monthly payments for a total of $12,000. At the end of that 20 year period, the provider has paid a total of $34,000 ($22,000 + $12,000) and will receive a payout of $100,000. This means they made a total of $66,000 in 20 years. which is less than an 8% annual return.
How Much Do You Get When You Sell Your Life Insurance Policy?
If you qualify to sell your life insurance policy, the average payment is around 20% of the death benefit. The exact amount you will receive depends on several factors, including:
- The value of the policy | A policy worth $500,000 will provide a higher payout than one worth $100,000
- The type of policy | A whole or universal life insurance policy will be eligible for a life settlement without the potential for additional conversion charges.
- Your age | The older you are, the more you will likely receive.
- Your health status | If you have had a significant health change since you purchased your policy, you are more likely to be eligible and receive a larger payout.
- Your gender | Since women have a longer life expectancy than men, generally they receive less for their settlement.
- If you choose to sell all or part of the policy | There are options to sell only a portion of your policy that will reduce the amount you receive, but preserve a percentage of the death benefit.
The best way to learn what you might expect your policy to be worth is to use a life settlement calculator where you can enter all these factors to get the most accurate estimate.
First, you need to make sure you qualify for a life settlement. Not everyone qualifies to sell their life insurance policy, so it is important to understand what the requirements are for selling before you try to calculate the exact amount. In general, in order to sell your policy, you must:
- Be over 65 years old. If it is a survivorship policy, the youngest person on the policy must be over 65. Generally the older a policyholder is, the more valuable their policy will be.
- Have a policy worth over $100,000. Small policies worth less than this will not be eligible.
- Have had your policy for over 2 years. A brand new policy is not eligible for a life settlement.
- Have a type of policy that allows life settlements. Generally universal, whole life, convertible term, and survivorship policies will be eligible, and some term life insurance policies are eligible if they can be converted to one of these types.
Life Settlement Advisors: Helping You Get the Most Out of Your Life Settlement
At Life Settlement Advisors, we know how important the decision to sell your life insurance policy can be. We have decades of experience helping people just like you navigate the life settlement process. We would love to connect and help you understand what your options are. If selling is the best thing for you, we will guide you through the entire process to make sure you get the best options available. Get in touch today to learn more.
