Life settlements can be a complicated industry to understand for those new to the practice. However, the number of life insurance policies nationwide continues to grow year after year. According to PolicyGenius, about 54% of Americans are currently holding policies. For this reason, it’s important to understand what your options are pertaining to life settlements and how to explain it to a family member or loved one without a policy.
What is a Life Settlement?
A life settlement is simply the sale of a life insurance policy to a third party. Policyholders may decide to sell their policy for a variety of reasons rather than letting it lapse. In doing so, they’re able to gain a monetary payout greater than the policy’s cash surrender value, but less than the policy’s net death benefit.
How Do Life Settlements Work?
If at any point within your term, you’d like to transfer ownership of your life insurance policy, life settlements are the option for you. Leveraging a licensed individual to help you through the process is a good place to start. These individuals range from brokers to direct-to-consumer buyers who will not only guide you through all the steps to sell your life insurance but they will also be the ones buying your policy from you. Once ownership is transferred and you receive your lump sum cash payment, they will be fully responsible for the monthly premiums associated with your policy.
Why a Life Settlement?
Life settlements allow policyholders another option for getting rid of their policy in exchange for a lump sum cash payment. While life settlement transactions are regulated by state insurance commissions, there are definitely a few factors to consider, as well as mistakes to avoid when considering the idea of settling your policy.
Age/Health - Older policyholders and those with serious medical conditions make up the majority of people who successfully garner a life settlement.
Policy Type - Those holding universal, whole, or convertible policies are eligible
Size of Policy - Most settled policies hold a face value of $100,000 or more.
Life Insurance Policy Premiums - The amount of premium payments will be used to determine a suitable offer value
Length of Policy - The amount of time your policy will need to be paid is factored into your settlement
Protecting Yourself and Avoiding Mistakes
There are several mistakes you’ll want to avoid in order to protect yourself through the life settlement process.
Don’t rush into a settlement - While it is a very freeing option for some, a life settlement is not for everybody. Make sure to do additional research to fully understand what you’ll be getting into in order to sell your life insurance policy.
Research your life insurance settlement broker or buyer - You’ll need to perform some due diligence on him/her before engaging in a settlement. LISA’s Find a Member Tool helps you to find a licensed and authorized expert in your state. Ensuring you have an authorized expert helping you will ease any worries you have when facilitating this important transfer of ownership.
Speak with your accountant or financial advisor - Before making the decision to settle, a financial professional will be able to help you decide if this option is prudent for your unique circumstances. They’ll likely understand your financial situation and will have your best interest at heart as you move through the planning process.
When deciding on whether or not to sell your life insurance policy, understand that you are not alone. There are several resources available to help guide you through the life settlement process. The Life Insurance Settlement Association has several authorized and seasoned members that’d be more than happy to discuss your options with you. Need more information? Subscribe to the LISA blog so you can stay up to date with everything pertaining to the life insurance settlement industry.