The life settlement option – in which an individual sells his or her life insurance policy to a third-party investor for immediate cash payment – is gaining more awareness in the U.S. As a growing number of American seniors learn about this option for a life insurance policy they no longer need or can afford, they’re concluding that it provides a way to monetize the value of the policy as an alternative to lapsing or surrendering the policy back to the insurance company.
If this potential financial strategy sounds appealing to you, the next step is to determine whether you are may qualify for a life settlement transaction.
To be clear, not all seniors with life insurance policies are good candidates for life settlements. For those consumers who no longer need or can afford their policies – but who don’t qualify for a life settlement – there are other possibilities you may want to explore. You can learn more about the alternatives other than selling a policy here.
So, what are the factors that make someone a good candidate for a life settlement transaction?
To be blunt, life expectancy is the key component in determining whether you are a good candidate for a life settlement: the shorter the life expectancy, the more attractive the policy is to a buyer. This is because the longer a person is projected to live, the greater the amount of premiums that need to be paid and the longer the investor must wait to collect the death benefit. So your current age, projected life expectancy and health condition are all critical factors in determining if you are a good candidate for a life settlement.
The next most important criterion is the size of your life insurance policy. If the death benefit on the policy is less than $100,000, it won’t attract a lot of interest from potential buyers – and realistically, a policy probably needs to have a face value of at least $200,000 to generate the most meaningful offers. This may change in the years to come, but at this point the life settlement providers who are buying life insurance policies have essentially set the minimum bar at $100,000 in death benefit.
There are also some financial considerations regarding the type of insurance policy you have that will determine whether you are a good candidate for a settlement. All types of life insurance policies could qualify for sale in the life settlement market, but universal life policies and term life policies are the most commonly purchased policies because they tend to enable the buyers to make the most compelling offers to you.
It’s important to stress that a life settlement may still be an option for lots of seniors who fail to meet one or more of these ideal criteria. For example, there are creative ways to sell part of the death benefit in your policy and still retain part of it for your heirs. There are some life settlement providers who are willing to look at your policy even if the face value is as low as $50,000. And there are a number of investors out there who have been known to make offers on all types of policies, including “joint survivorship” policies and group life policies.
Life settlements may not be for everyone, but for the senior who qualifies, a life settlement may be a far better option than lapsing or surrendering a policy they no longer need or can afford.