Life insurance settlements, also known as “senior settlements” or “life settlements” are existing life insurance policies sold to a third party for a one-time cash payment. The payment is more than the sell value but fewer than the actual death payments. After the sale, the purchaser is the new policy owner and assumes the payment of its installments. By doing so, they get the death payment when the insured is deceased.
The sale of life insurance is an often untapped potential source of money for individuals who may not need life insurance but have other immediate financial needs like medical debt.
Experts note that abuses are not uncommon, regulation is inconsistent, and anybody looking to sell a life insurance policy to a third party should be careful.
The buyer, typically the investor, takes over the life insurance payments and becomes the beneficiary at any time the former policy holder dies. Life settlement is normally good for individuals with a life expectancy of two to ten years.
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How Life Settlements Work
When you purchase life insurance when healthy and young, you will pay less and it would be easy to get a policy. When you have an existing policy and want to sell it in a life settlement given that you are old and sick, it will be easier for you to sell and get more money out of it.
By selling it, you will transfer every aspect of the insurance policy to the buyer. Meaning that the investor who purchases the policy owns and becomes responsible for all the aspects related to the policy including the death benefit and the premium payments. When the owner eventually dies, the new owner- who is a beneficiary after the transfer receives the payout.
Eligibility And Settlements Offers
Generally, individuals older than 65 are candidates for life settlements. They hold life insurance policies with death benefits higher than $100,000. Younger policy holders qualify if they have serious health conditions. In case you are younger than 70 years old with no acute health problems, you’re unlikely to get a bid for more than the surrender value of the policy.
The main aim of selling a life insurance policy is to get more than the policy’s monetary value should the owner of the policy surrender it to the insurance company. Notably, it would be substantially less than the value of the death benefit. Normally, it is about 10 to 25 percent of the policy benefit amount.
The amount received during the settlement can be further reduced by the costs incurred in transactions, including fees and commissions, along with taxes due. However, each case is distinct, contingent on a number of factors.
Whether you can sell the life settlement and how much you can get for it are dependent on your age, details of the life insurance policy including the premiums, and your health status.
When you’re looking for a life settlement, you’re required to fill out a lot of paperwork and share your medical records. The purchaser will utilize this information, together with your gender, race, lifestyle and family medical history, to determine your life expectancy. In some cases, you may be required to take a medical exam.
According to the Financial Industry Authority (FINRA), there are legitimate reasons for life settlements and one should be careful. Because whenever you sell your life insurance policy, the buyer is acquiring a financial interest in your death. This kind of transaction may target old people who may be in poor health. The process can be prone to aggressive sale tactics and abuse.
Regulations Handled By States
Life settlements regulations are handled at the state level. 43 states have laws of varying severity on the books. That excludes eight states and the District of Columbia with no regulations governing these transactions. This is inconsistent and confusing.
Most states that have regulations governing the life settlements need a minimum of two years between the purchase and sale of a life insurance policy. A total of ten states need five-year waits. The State of Minnesota requires a wait of four years. Most of the states grant exemptions for the waiting periods in specific circumstances like divorce, terminal illness or retirement.
Investing In Life Settlements
Life settlement companies usually bundle the policies into funds and sell interest in the funds to investors. It helps in mitigating the risk of individual, initial policy holders outliving expectations.
It is an area in which improper use has occurred and risks can be high. One potential risk to buyers is that the insurance firms may refuse to pay the benefits because of any alleged issues with the policies. At times, the insurance company can go bankrupt. Investing fees may be high including large commissions for brokers.
Why Sell Your Life Insurance Policy?
There are numerous valid reasons that one may no longer need a life insurance policy. For instance, the beneficiary may no longer need the money or is deceased. Or in some cases, the policy was purchased to provide support for children who are now adults able to provide for themselves.
The policyholder may also not afford or just does not want to pay the premium. He or she may need cash to cater for an emergency or want to make an investment.
As with all financial decisions, you must consider your personal needs and conduct your research before you sell your life insurance policy. For some, life settlements may make sense, but for others, they have other avenues to exploit.
