Life Policy Owners

Why Sell?

Like any personal property, your life insurance can be sold through a life settlement.

What is a life settlement?

A life settlement is the sale by the owner of a life insurance policy to a third party for an amount greater than its cash surrender value and less than the death benefit. The seller of the policy receives a cash payment. The buyer of the policy assumes all future premiums payments and receives the death benefit upon the passing of the insured.


Watch the video below to a learn a little more about your money and your life insurance.

Consumer-Awareness-Small


Each year more than $100 billion face value of life insurance lapses by seniors over the age of 65 – mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold.


There are numerous reasons to consider selling a life policy:

  • The premiums are no longer affordable

  • The need to replace lost income in case of death of the insured no longer exists

  • The need for funds to pay estate taxes no longer applies

  • There is a need for resources to pay for health expenses and long term care

  • A term policy may be reaching the end of the coverage period

  • Funds are wanted to improve a retirement lifestyle

The sale of a life policy is not for everyone. 
There are alternatives other than selling a policy that may be appropriate for a policy owner’s circumstances:

  • Keep the policy inforce through a loan or use of the cash surrender value

  • Seek an accelerated death benefit, if available

  • Assign the policy as a gift or charitable contribution

  • Covert a term policy to permanent insurance

  • Reduce the death benefit with a lower face value and lesser premiums

  • Lapse or surrender the policy

Important:

Anyone considering a life settlement should first talk with their insurance, financial and/or legal advisor to explore all legal, tax and other consequences from selling their policy. 

 

Do I qualify?

In general, the following qualification criteria applies:

Age and health status of insured:

Seniors who are age 65 years or older. Younger insureds may qualify, depending on certain medical conditions.


Type of insurance policy:

LISA members can help you with every type of insurance policy, including term insurance.  However the majority of policies sold in the secondary market for life insurance are universal life insurance policies. 

The life insurance policy premiums:

The amount of the premium payments to keep the policy in-force will also play a role on the offer amount. 


Life insurance policy death benefit (face value):  

Life insurance policies with death benefits of more than $100,000 are most desirable. However, some smaller policies can be sold.    

Consumer Tips:

Policies may be owned individually or through a corporation, foundation, trust, non-profit organization or business. It is also very important that all beneficiaries understand the process, agree to the sale and are actively involved in the sales process.
 

How much can I get?

Selling your life insurance policy

When you sell your insurance policy, you receive a cash payment.  The buyer pays all future premiums and receives the death benefit when the policy matures (when the insured dies). 

Every case is different. The amount you receive will depend on:

  1. The death benefit/value of the policy – amount investor receives at the death of the insured
  2. The annual premiums – the amount of premiums that will be paid until the insured dies
  3. The number of years premiums will need to be paid – the remaining expected life of the insured
  4. The rate of return the buyer of the policy requires to make the investment

The amount received from a policy is a mathematical determination that takes into account the impact that each of the factors has on the value.  The higher the premiums, the longer the life expectancy and the higher the required investor’s return, the lower the value of the policy. Conversely, the lower the premiums, the shorter the life expectancy and the lower the investor’s required return, the higher the value of the policy.  


The amount received from selling a policy will always be greater than the cash surrender value and less than the death benefit value.

 

Cash Meter Example

“Americans who sold their unwanted life insurance policies, collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.”
London Business School Study, 2014

“US policy owners received 4-8 times more than the policy cash surrender values from life settlements from 2006-2009."
US Government Accountability Office (GAO) Study, 2010

Consumer Tip:

Life settlement transactions are complex. Anyone considering a life settlement should first talk with his or her insurance, financial and legal advisors and work with members of the Life Insurance Settlement Association.

Selecting an Advisor

selecting-a-life-settlement-advisor-to-sell-your-unwanted-life-insurance-policy
Understanding the parties involved 

When a policy owner decides to explore whether selling a life insurance policy is a good option for their unique circumstances, the owner or his/her financial advisor should start the process by contacting a member of the Life Insurance Settlement Association who is either a life settlement broker or provider.

Consumer Advisors:

  • Life settlements can be complex financial transactions and are generally conducted on behalf of clients by experienced professional advisors.
  • When representing a client, financial professionals have a duty to represent the best interests of that client.
  • Compensation for service can be paid by fee or, if licensed, by commission.
  • Financial professionals recognize that life settlement regulation varies by state. It is important to know which laws and regulations – if any – apply in your state.

It’s possible to sell your policy through a Life Settlement Broker or Provider

Life Settlement Brokers:

  • Connects the sellers of an insurance policy with buyers.
  • They represent the policy owner and negotiate the offer that best serves the needs of the seller, which may be accepted or rejected by the policy owner.
  • They owe a fiduciary duty to the policy owner.
  • A Broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the owner whose compensation is not paid directly or indirectly by the Provider.

Life Settlement Provider: 

  • Specializes in purchasing life insurance policies in the life settlement market.
  • Providers normally raise capital from institutional investors.
  • Working directly with a provider may eliminate intermediaries and expedite the transaction.  
Sales Process

Understanding the process of selling your unwanted life insurance policy

Each individual scenario could be different based on the parameters of the transaction. 

Life Settlement Process Explained       Life Settlement Application Signed

Step 1 | Discovery:

Policy owner realizes that his/her life insurance policy is an asset that can be sold. 

Step 2 | Representation:

If a life settlement is determined to be the best option, the policy owner or the advisor contacts a member of the Life Insurance Settlement Association who is either a life settlement broker or provider to begin the process. It's possible to engage in a life settlement through both. 

Step 3 | Application:

After choosing proper representation to settle a policy, the policy owner must fill out an application and provide policy, ownership and insured information including a list of physicians and/or medical records for underwriting. It is crucial that you discuss all your privacy and security rights.
 

Step 4 | Underwriting:

The settlement company submits the medical records for review by an independent life expectancy company. Life expectancy companies calculate the probable life expectancy using actuarial and physician experts.
 

Step 5 | Analysis:

Each life settlement provider/buyer calculates the market value for the policy presented for sale. Companies may consider different factors when valuing a policy, including contract specifics such as premium expense, death benefit and carrier ratings, as well as insured information such as age and life expectancy underwriting.
 

Step 6 | Offer:

The provider/buyer will either decline or extend an offer to the policy owner or broker. A broker will seek competing offers from other providers/buyers. The policy owner can accept or decline any offer.

Step 7 | Purchase and Sale Agreement:

If the policy owner accepts an offer, the provider that made the offer will prepare a purchase and sale agreement and other documents formalizing the transaction. The policy owner, insured and beneficiaries then sign this package. The provider will review, complete due diligence and countersign the package. The funds for the settlement transaction are then placed in an escrow account.
 

Step 8 | Notification:

The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the provider.

Step 9 | Funds Transfer:

Upon written verification of the change of ownership and beneficiary, the escrow agent releases the settlement payment to the seller of the policy.


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The Life Insurance Settlement Association (LISA) today endorsed H.R. 5958, the “Senior Health Planning Account Act”, introduced by Rep. Brian Higgins (D-NY) and Rep. Gregory Steube (R-FL).

WASHINGTON, DC, March 3, 2020 – The Life Insurance Settlement Association (LISA) today endorsed H.R. 5958, the “Senior Health Planning Account Act”, introduced by Rep. Brian Higgins (D-NY) and Rep. Gregory Steube (R-FL).  This bipartisan legislation will help millions of seniors generate billions of dollars for their health care needs through the sale of their life insurance policies – known as a life settlement – by permitting them to use the proceeds, tax-free, to pay for their health care costs.

The Senior Health Planning Account Act will help seniors plan and pay for their health care costs, including long-term care expenses, before they hit. 

Under the Act, seniors will be able to roll over their life insurance sale proceeds, tax-free, into Senior Heath Planning Accounts, which would be dedicated to paying health care costs for themselves and their spouse. The Accounts would be exempt from federal income taxation, similar to existing federal tax programs that encourage younger working Americans to invest in their own health care. 

Current law already provides that the proceeds from the sale of life insurance—known as life settlements—are tax-free, but only if the policies are sold after the policy holders are seriously ill, by which time they often no longer own their policies.  The Senior Health Care Account Act builds on current law to provide seniors needed flexibility to plan for future expenses. 

The Senior Health Planning Account Act is expected to result in substantial Medicaid savings because private resources would be used to pay expenses otherwise borne by taxpayers. The Act also is expected to generate substantial tax revenues.

“We applaud Representatives Higgins and Steube for creating a way for American seniors to deal with the crushing costs of health care in retirement,” said Chris Conway, Chair of LISA’s Board of Directors, adding “This is an innovative private sector solution to address the escalating costs of health care burdening not only American seniors, but state and federal Medicaid budgets.”

“H.R. 5958 will allow millions of seniors to use life insurance assets they already own to help provide for their own health care in retirement,” said Michael Freedman, Chair of LISA’s Public Policy Council. “Seniors are the only group of Americans who are not eligible for existing tax programs for contributing their own resources to help pay for health care,” added Freedman.

Life insurance policies are among many families’ most valuable assets, with 138 million individual life insurance policies, with a total face amount of over $12 trillion, in force in 2018. Yet fewer than one in ten policies (by face amount) ever pay a death benefit, with over 90 percent ending in a lapse or surrender.

In 2018, 7.7 million policies, with an aggregate face amount of $570 billion, lapsed, for which policyowners received nothing.  That lapse rate that was 40 percent higher than just five years earlier, and, for retirees, the lapse rate is 25% higher than for policyholders generally.

Seniors who sell their life insurance policies receive significantly more than if they terminate their policy back to their insurance company.  In a 2017 report, the National Association of Insurance Commissioners (NAIC) stated, “Policyowners who sell their policies receive a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy, according to government and university studies.”   Life settlements are highly regulated by state insurance departments through extensive licensing requirements for buyers and brokers and standards ensuring the strongest senior consumer protections.

As more and more seniors are faced with the challenge of how to pay for the increasing costs of health care, including very expensive long-term care, life settlements can help. The NAIC endorsed life settlements as “one option seniors might use to generate resources to pay for their long-term care needs,” in a 2017 report focused on private market options for financing long-term care.

Bryan Nicholson, LISA’s Executive Director, called on Congress to adopt H.R. 5958, stating “The Senior Health Planning Account Act will increase awareness that life insurance policies are an asset that seniors don’t have to lapse or surrender back to insurance companies. Life settlement proceeds will provide billions of dollars of living benefits for seniors to use for their own health care.”

Resources:

The Life Insurance Settlement Association (LISA) is the nation’s oldest and largest organization representing participants in the life settlement Industry, with a current membership of more than 70 companies doing business in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. LISA’s mission is to promote the development, integrity and reputation of the life settlement industry, to advance the highest standards of practice and professional development for the industry, and to educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy. For more information, please visit www.lisa.org

 

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