Life settlement is the term used to describe the process through which the owner of a life insurance policy sells the policy to a third party. Sellers receive cash in exchange for transferring the ownership of their policy to a buyer. The seller receives an amount of money that is greater than the policy’s cash value at the point of sale, but less than the policy’s death benefit. The buyer becomes the new owner and beneficiary of the policy and pays all future premiums until the policy matures, at which time, the new owner receives the death benefit of the policy. Selling a policy is regulated, and available in all states.
The combination of insured’s health condition and age is an important factor in qualification for a life settlement. Purchasers may have different criteria, however most commonly life settlement purchasers require a minimum insured age of 65 years or older. However, younger insureds may qualify if diagnosed with a serious health condition.
All policy types, including term, whole life, adjustable life and universal life may qualify. Some purchasers will also consider group life and Federal Employee Group Life Insurance (FEGLI). Commonly, policies with death benefits of $100,000 or more may qualify, although some purchasers may consider smaller policies.
Whether you choose to work with a broker or sell directly to a provider, there are several steps you will go through to complete the sale of your unwanted or unneeded life insurance policy. The steps in the life settlement process are:
Applications/Qualification: The process begins with the owner and insured granting permission to gather information to evaluate the policy. For the owner, this means a request for information from your life insurance company concerning the premiums and benefits provided by your policy. For the insured, giving permission to request medical records for underwriting. At this time the owner and insured may receive additional information and disclosures.
Information Gathering: Once the owner and insured have granted permission, information will be gathered from the insurance company and from the insured’s physicians. Once the medical records are received, they are reviewed by specialty actuaries and underwriters.
Appraisal/Valuation: All of the information about the policy and the insured underwriting are combined and evaluated to determine the current market value of the policy. Each policy and insured combination are unique, and therefore each policy must be considered individually.
Offers to Purchase: Keep in mind that any offer to purchase consists of both the amount of money the buyer is willing to pay and any terms they may propose to complete the transaction. Terms include timing, and other conditions that may need to be confirmed before the sale is completed.
There are many different things that impact the processing time of a life settlement. Life insurance companies can take as much as 4 weeks to respond to request for information. Medical records collection processing times depends varies widely by physician, but on average can take 2-4 weeks and sometimes longer.
Medical underwriting and valuation processing can take about 3-4 weeks. Once you accept an offer, contracting and due diligence lasts approximately 2-4 weeks. Life insurance company processing time, to change the owner and beneficiary, is typically 2-4 weeks. Most often, these processes occur in parallel.
The items most impactful to the timeframe are the processing times at the life insurance company, the copy service times at the different physician’s offices and how quickly the owner and insured respond to requests. In general, plan on three to five months in total.
Life Settlements are a regulated transaction in 43 states. A life insurance policy is purchased by a licensed buyer called a provider. Sellers may engage the services of a life settlement broker. In addition, a policy sale includes the services of an escrow company, typically a bank.
Many life settlement companies offer quick calculators or estimators. However, these calculators rely on very limited information and may serve best as an indication of whether or not a policy could have value. Each policy and insured are completely unique combinations, and the only true way to understand if your policy value is to be properly underwritten and solicit bids. A recommended first step is to speak with a LISA member, a life settlement professional who, in a short conversation, can ask pertinent questions and provide guidance about a policy’s potential market value. Speaking with a life settlement professional will help you understand your options.
Policy owners have a few options if they cannot continue to afford their policy premiums. The possible exit strategies for an unaffordable, unwanted or unneeded life insurance policy include:
- Lapse – stop paying premiums and allow the policy coverage to simply expire
- Surrender – return the policy to the insurance company and receive the cash surrender value
- Accelerated death benefits / premium waivers – insureds with qualifying terminal or chronic illness may be eligible to receive a portion of the policy death benefit or to have premium requirements waived while living. Not all policies include this benefit and qualification requirements vary. Details of this benefit can be found in your policy copy; or
- Assignment of the policy as a gift – this alternative may have tax implications, and premiums may still be required of either the donor or recipient.
For more information about which option that may be available, please consult with a LISA member company.
Life settlements are considered an alternative fixed income investment and are an attractive asset class for institutional portfolios seeking long term investments. Fund specializing in alternative investments, pension plan investments, banks, insurance companies and private equity firms are examples of the type of investors in the life settlement market.
Fractionalization and selling of multiple interests in the ownership of a life insurance policy is not an appropriate investment for most if not all investors because it creates an investment structure with unique and complex risks that are not easily understood by most investors. See LISA’s statement on fractionalized interests.
Simplistically, a policy’s valuation is based upon the amount of death benefit, the age and health of the insured and the expected amount and duration of premiums required over time, along with investment considerations.
There are potential tax implications related to the sale of a life insurance policy. IRS Revenue Ruling 2009-13-15 explains the possible tax consequences of selling a life insurance policy as a life settlement. Most recently, Internal Revenue Bulletin 2020-05 provided additional guidance on provisions within the 2009-13-15 Ruling. In all cases, the seller of a life insurance policy will receive 1099. Anyone selling a policy should secure the services of a competent tax professional to ascertain the specific ramifications that apply to them when selling an unwanted or unneeded policy.
Working with a LISA broker or provider (i.e. buyer) member means working with a life settlement specialist who understands how to help a policy owner evaluate options and can either solicit or extend bids to purchase a policy that has become unaffordable or no longer needed. LISA members maintain licensing to operate in states as required, providing policy owners and insureds assurance that transactions and disclosures are handled as required by regulation. In addition, LISA members are subject to a rigorous vetting process prior to acceptance and must acknowledge and adopt both the LISA Bylaws and the LISA Standards of Practice.
Yes. Regulations have been passed in 43 states, and registration or licensing is required for both brokers and providers (i.e., buyers). It is important to work with properly licensed firms who are required to follow the regulations governing the transaction including providing state mandated disclosures and maintaining the privacy and confidentiality of consumer information.
What are the typical disclosures with which I should expect to be provided during the transaction process?
Each states’ regulations specify the disclosures a licensed broker and provider must make to a consumer who sells a policy. For correct contact information, please refer to the NAIC state insurance departments page for more information about a particular state’s disclosures.
The life insurance settlement industry takes privacy issues very seriously. In most cases, the identity of the insured person or their financial or medical information may not be disclosed unless it:
- is necessary to effectuate a life settlement contract between the seller and a life settlement provider (i.e. buyer) and the seller and the insured have provided prior written consent to the disclosure;
- is provided in response to an investigation or examination by the commissioner or another governmental office or agency;
- is a term or condition to the transfer of a policy by one life settlement provider to another life settlement provider;
- is necessary to permit a financing entity, related provider trust or special purpose entity to finance the purchase of policies by a settlement provider and the seller and insured have prior written consent to the disclosure; or
- is necessary to allow the life settlement company or its authorized representative to make contacts for the purpose of determining health status.
Policy owners and insureds generally do not incur any out-of-pocket costs to pursue a life settlement. Obviously, brokers, providers and other businesses involved in a transaction are compensated for the work they do, but these expenses are factored into the transaction. Consumers do not have to pay out-of-pocket to explore the life settlement option.
Yes, life settlements are both legal and regulated. In 1911, the U.S. Supreme Court issued a decision in Grigsby v. Russell, which recognized the rights of the life insurance policy owners to transfer ownership of their life insurance policies to a third party that was unrelated to the policy owner/insured and did not hold an insurable interest in the policy owner/insured. This landmark ruling paved the way for the birth of the life settlement industry in the United States because the Court upheld a policy owner’s right to assign his/her life insurance policy.
As of 2015, 42 states and the territory of Puerto Rico regulate life settlements, affording approximately 90 percent of the United States population protection under comprehensive life settlement laws and regulations. Of these states, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy, while 10 states have five-year waiting periods and one state (Minnesota) has a four-year waiting period. Most states have provisions within their life settlement acts whereby one can sell their policy before the waiting period if they meet certain criteria (i.e. owner/insured is terminally or chronically ill, divorce, retirement, physical or mental disability, etc.).
Moreover, 20 states follow the National Conference of Insurance Legislators (NCOIL) Life Settlement Model Act, representing almost 53 percent of the U.S. population.
Transparency is a key part of life settlement regulation around the nation. Recent laws call for full disclosure of how much compensation is earned from a transaction, as well as communication of all offers, counteroffers, and rejections throughout the transaction process. In addition, most states require that consumers are provided with information about alternatives to settlements, risks related to taxation and government assistance, and the licensing of life settlement brokers and providers.
For the vast majority of states, a life settlement transaction is regulated by each state’s Department of Insurance, which typically requires the buyer (i.e. life settlement provider) of the life insurance policy to be licensed by that state. Most states require all forms used in the transaction to be reviewed and approved to assure clarity and fairness. Regulated states have rules that the broker and buyer must follow, such as when the sale proceeds must be placed into an escrow account, or when the proceeds must be released to the seller after the transfer of ownership has been acknowledged by the carrier. In this way, the regulations protect the seller.
A viatical settlement is a contractual agreement to provide a life insurance policy holder with immediate cash in exchange for the sale and transfer of life insurance policy ownership rights.
A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is generally 24 months or less.
- Some states do not distinguish the difference in terminology of a life settlement and viatical settlement. It is always best to speak with a member of the Life Insurance Settlement Association to understand how regulation, tax laws and how the transaction requirements differ from state to state.
- It’s important for consumers to understand the differences between viatical settlements and accelerated death benefits.
Life settlements are very common, but unfortunately many seniors – and their financial and legal advisors — are unaware that a life insurance policy is personal property. Life insurance policies may be sold to institutional investors for a value greater than their cash surrender value.
In an Agent Media/Life Insurance Settlement Association (LISA) 2011 Life Settlement Market Study, nearly 25 percent of agents said that greater consumer awareness of life settlements would help them foster more settlement opportunities.
The good news is that consumer awareness is on the rise. Many states now require life insurance carriers to notify policy owners about life settlement options when they are about to lapse a policy. These measures and efforts by LISA and the industry have raised awareness of the life settlement option for policy owners.
As the voice of the life settlement industry, LISA has adopted a position and stated publicly that this marketplace is not appropriate for individual investors acting on their own. The primary buyers of life settlements are institutional investors, such as pension funds, endowments, foundations and private equity funds.
Investing in life settlements is strongly discouraged for all but the most experienced investors. Most life settlement companies do not accept individual investors, and LISA doesn’t advise any individuals to invest their retirement savings in the industry.
If you have additional questions or would like to speak to an expert, please reach out to a LISA member for more information and visit our blog for additional content.