Key Takeaways
- Sale of life insurance policy for cash above surrender value.
- Buyer pays premiums, collects death benefit upon insured's death.
- Typically for seniors 65+ with policies over $100,000.
- Provides policyholders liquidity without lapsing coverage prematurely.
What is Life Settlement?
A life settlement involves selling your existing life insurance policy to a third-party investor for a lump sum that exceeds the policy's cash surrender value but is less than its face value or death benefit. This transaction transfers ownership and premium payment responsibilities to the buyer, who collects the full payout when the insured passes away.
This option is typically available to seniors who no longer need their policies and seek liquidity beyond what surrendering the policy offers.
Key Characteristics
Life settlements have distinct features that differentiate them from other financial options:
- Policy Eligibility: Usually for seniors aged 65 and older with policies valued at $100,000 or more, including term, whole, and especially universal life insurance.
- Cash Surrender Value vs. Death Benefit: Sellers receive more than the cash surrender value but less than the death benefit, which the buyer eventually collects.
- Ownership Transfer: The investor assumes premium payments, making ongoing financial commitments after purchase.
- Medical Underwriting: Buyers evaluate your life expectancy and medical records to price the policy accurately.
- Beneficiary Implications: Once sold, original named beneficiaries no longer receive proceeds; instead, the investor gains the payout.
How It Works
To initiate a life settlement, you typically work with a licensed broker who helps assess your policy’s value based on your age, health, and policy type. The broker submits your application and medical information to potential buyers who bid on the policy.
Once you accept an offer, ownership transfers to the buyer, who then pays the premiums until the insured’s death to receive the policy’s full death benefit. This process provides you with immediate cash, often significantly higher than surrendering the policy.
Examples and Use Cases
Life settlements can serve various financial needs and situations, especially for baby boomers seeking to unlock capital from their life insurance policies.
- Retirement Funding: Seniors with high-premium policies may sell them to free up cash for living expenses or travel.
- Debt Relief: Proceeds can be used to pay off outstanding debts or medical bills, offering financial flexibility.
- Investment Alternatives: Investors, including companies like Prudential, purchase these policies to diversify portfolios away from traditional stocks and bonds.
- Portfolio Strategy: Life settlements provide an alternative to fixed-income investments, complementing low-risk approaches such as those found in best low-cost index funds.
Important Considerations
Before proceeding, understand that selling your policy means losing coverage and future benefits, so ensure you no longer need the protection. Life settlements also require disclosing sensitive medical information, which may affect privacy.
Regulation varies by state, so use licensed brokers to avoid scams. Additionally, proceeds may have tax implications depending on your situation; consulting a tax professional is advisable for clarity.
Final Words
Life settlements can unlock significant cash value from unwanted life insurance policies, often exceeding surrender values. To maximize your benefit, compare multiple offers and consult a qualified broker to assess your policy’s worth.
Frequently Asked Questions
A life settlement is the sale of an existing life insurance policy by the policyholder to a third-party investor for a lump-sum cash payment that is more than the policy’s cash surrender value but less than the death benefit.
Typically, seniors aged 65 and older with life insurance policies valued at $100,000 or more are eligible. Policies can be term, whole, or universal life, with universal life being the most common.
The policyholder applies through a licensed broker who evaluates medical records and life expectancy, then providers bid on the policy. Once a bid is accepted, ownership transfers to the buyer who takes over premium payments and receives the death benefit when the insured passes.
Life settlements offer more cash than surrendering the policy, helping policyholders free up funds for living expenses, debts, or medical costs. It also helps avoid policy lapse and provides liquidity when the policy is no longer needed.
You will lose your life insurance coverage and may face future insurability issues. Additionally, the payout depends on life expectancy and requires sharing private medical information. Tax consequences may apply, so consulting a tax advisor is recommended.
Life settlements are for generally healthy seniors aged 65+ with policies over $100,000, while viatical settlements are for terminally or chronically ill individuals with shorter life expectancies. Viatical settlements typically address immediate medical or living expenses.
Yes, the proceeds from a life settlement can be used for any purpose, such as covering living expenses, paying off debt, traveling, or medical costs, providing greater financial flexibility.
Yes, because regulations vary by state, working with licensed brokers or providers helps protect against scams and ensures the transaction complies with legal requirements.
