A life settlement is a situation where people sell their life insurance in exchange for cash to people who want to buy it by transferring ownership of their policy to the buyer. These people who buy it are basically investors. The cash amount is more than the policy’s surrender value but it’s often less than the death benefit. The buyer pays all the future premium payments and upon the death of the owner of the insurance, which by this time, the policy matures, receives the death benefit. Death benefit is what a policy holder’s family or beneficiaries gets after their demise. See this article for more on this.
Reasons to Sell
Keeping a life insurance policy will generally be of great benefit to your beneficiaries but life cannot be predicted. There are several reasons why a person might sell their insurance in spite of these benefits. We will now quickly look at some of these reasons.
As a person grows older, it is possible that health issues could arise. Considering that health care is not cheap as costs keep rising on a daily basis, funds may be needed to pay for treatments and medications which might not be covered by your health insurance.
Premium Payment Affordability
A lot of the time as the insured grows older and enter into retirement, paying their monthly or annual premium may get more difficult. This could be because the owner might not be earning income like they used to or other financial needs have higher priority at the time. It could also be the result of having the cost of the premium being raised over the years by the insurance company to the point where it becomes too expensive.
The Coverage might no longer be needed
It is possible for a life insurance policy to outlive its purpose as its original beneficiary or beneficiaries might no longer need it. The policyholder might have used their children as beneficiaries and they are now financially independent and do not need the proceeds from it. It might be a spouse who was the beneficiary and the said spouse has passed before the insured. It may also be due to a divorce.
Another scenario is the sale of a business where there was protection with a buy-sell agreement. Sometimes, the death benefit might no longer be needed but a policyholder might still keep it for the same reason an investor might want to buy it.
Every case is different and unique. As a policyholder, you need to consider why the insurance was purchased initially and if it is no longer needed or if it has become burdensome to pay the premiums, evaluate and reconsider your options.
Benefits of Selling
The owner of the insurance should be aware that they can sell their policy to get cash for whatever they need to do. This might include paying for health care, debts or funding an investment.
One of the benefits of selling your insurance is the availability of cash or funds to take care of an immediate or urgent need like those listed above. In fact, in a case where the insured has more than one policy, it can be sold to fund the other policy.
Another benefit of selling your insurance benefit is that you no longer need to pay the burdensome insurance premiums which will make more resources immediately available to you.
To be eligible for settlement, there are several factors that will be considered. These include age, health, the size, and the type of policy.
Ideally, the age to qualify for a settlement is 70 years or older. Generally, the shorter a life expectancy, the more valuable the settlement is. This implies that the older a person is, the greater the interest for investors. Another factor might be persons with serious illnesses who may be younger than 70 but due to the illness have a shorter life expectancy.
Your policy size is the minimum size that may be considered for a settlement. $50,000 is most times the benchmark. There could be exceptions especially for persons with severe health issues.
The most common type of insurance considered for a settlement is the universal life. While term policies typically provide coverage for a set period, it can be converted to permanent coverage which can then be used for settlement. Whole life policies may also qualify for settlements but are more difficult because they are designed to build high cash values which might often be equal to the market value of the policy. See https://www.kitces.com/blog/life-settlements-selling-a-life-insurance-policy-thats-no-longer-wanted-for-more-than-its-cash-value/ for what can affect the terms of a life settlement contract.
In selling your insurance, there exists two options which are life settlement and viatical settlement. The major difference between these two is the life expectancy of the individual selling the policy. For viatical settlements, the life expectancy is under two years. They are usually for people who are terminally ill. Life settlements are for people who are reasonably healthy and have a life expectancy greater of over two years.
Steps to Selling
The market value of insurance policies depends upon several factors like the amount of death benefit, its premium and the individual’s life expectancy as noted earlier. Pricing insurance is not this easy though. The factors that might influence the policy’s value are the ongoing cost, the length of time in which payments will be made; this is estimated using the policy owner’s underwriting and also the size of the benefit offered by the policy.
When selling your policy, get an estimate and determine if you are eligible by using the settlement calculator from a suitable Life Insurance Settlement Guide. A professional will carry out an evaluation and you will receive an estimate based on your eligibility. If all goes accordingly, you will then be paid.
Selling your insurance should be a major decision. Determining why you have the policy in place and why you want to sell it is quite important. Reach out to a financial advisor or broker for advice on selling and to know what your options are. When you know how much you can get paid for it, decide if there are ways it can be of more benefit to you and your beneficiaries than holding out for the death benefit. It is not a decision to be rushed and to be protected, you can engage your lawyer or personal representative in the whole process.