What is a life settlement? Imagine you have a life insurance policy that you want to cash out on early. This is how a life settlement process works.
Typically, you can sell your policy to a third party for more than its overall cash value, but less than its net death benefit worth. Though you won’t be getting all the cash you’re due; you’ll be able to cash out quickly if you need money fast. The exchange occurs through a single transaction, rather than separate or monthly payments. You’ll receive a lump sum, and the process ceases from there.
One of the main reasons you might want out of life insurance policy is because it is too expensive. Life insurance can be an excellent tool for emergencies. If you or someone you love passes suddenly or unexpectedly, the insurance policy can provide family members with the funds they need to make burial and funeral arrangements and cover any other expenses that may accrue.
Unfortunately, if you’re low on money or you’re enduring financial struggles, that monthly insurance premium payment is likely to make things even worse. A life settlement will give you access to a single lump sum that you can use to resolve some of your financial difficulties.
Another reason you may try to sell your life insurance policy is that you no longer need it. You’ve been diagnosed with an illness that renders the policy null and void, or you’re likely to live beyond a certain age which will enforce a close on the insurance plan, preventing beneficiaries from receiving any funds.
How Did Life Settlements Begin?
The life settlement process can be dated back to the year 1911 – over a century ago. It stems from a U.S. Supreme Court case known as Grigsby vs. Russell. From that case, a law was established that declared life insurance as privately-owned property that could be reassigned or sold by the original owner.
Justice Oliver Wendell Holmes – who oversaw the case – suggested that life insurance was a valid investment platform, similar with stocks and bonds, and possessed the qualities and traits one would find in traditional, physical property. It was decided by Holmes that as such, life insurance could be sold to another party by the owner.
The case also solidified various rules surrounding life insurance and its transferability. You can ultimately name your beneficiaries (i.e., family, friends, etc.); change the beneficiaries over time; use the policy as collateral for a financial loan; borrow money from the policy or sell it to another party.
The Structure of a Life Settlement
Life settlements are structured similarly to other types of insurance. For example, if you’re looking for home, health or auto insurance, you’re likely to come across both providers and brokers. Providers spend most of their time and money on advertising. They typically run large consumer response centers or divisions devoted to customer needs.
Providers are usually only licensed to sell their own products. You won’t get access to other brands of insurance. Instead, you’ll be sold the policies directly being offered by the provider. Unless you like that product, you’ll probably want access to other insurance types.
Brokers, on the other hand, take a much more personal approach to insurance. Instead of working for a specific company like a provider, brokers work for you. Their hours are flexible, and they’ll offer multiple options that fit your needs and your budget. You’ll also likely speak to the same agent each time you initiate a call.
In the world of life settlements, you’ll come across both providers and brokers. This time, however, their functions are a little different. Providers often function as the third parties that purchase life insurance policies. They offer payments and work with advisors to tailor transactions to your circumstances. Every transaction is carefully reviewed to ensure it follows all proper regulations, which differ depending on the state a provider is based in.
As with other areas of insurance, providers are backed by institutional funds and are required to hold licenses to operate.
Brokers work to negotiate life settlement contracts, ensuring you gain access to the best offers from providers for their policies. Unlike providers, brokers get paid a commission off of the purchase price so it is their best interest to get you the highest offer possible.
Brokers will shop the policy around to ensure the offers are stable, private, and provide you with a fair amount of money once commissions are taken. It is a broker’s job to maximize the price someone gets for selling their policy which is why it can be better to go with a broker than direct to a fund.
Need to Sell Your Life Insurance Policy?
If you’re looking to engage in a life settlement process, contact us today. We are Harbor Life, and we’ll work hard to ensure you get the best price for your policy. We have direct access to life settlement providers across the country, and work hard to get you the best price possible on a case.
Call us to speak to one of our qualified representatives. We give equal time and consideration to every customer, so you can rest assured you’re in trusted hands. You can also visit our website for a free estimate today!