Life Settlements Explained
What Is A Life Settlement?
A life settlement refers to the sale of a life insurance policy to a third-party buyer for a one-time cash payment. The payment is more than the cash surrender value, but less than the death benefit of the policy. After the transaction, the third-party buyer becomes the policyowner and pays premiums to keep the policy in force until the insured person dies. Upon the insured individual’s death, the buyer collects the death benefit from the insurance company.
How Life Settlements Work
The life settlement process starts with a policyholder presenting their policy to a provider, broker, or life settlement company to determine their eligibility. During this time, the third party will review medical records and policy information to see if the person qualifies for a life settlement. If the person is eligible for a life settlement, they may be presented with an estimate of their policy’s value. The individual can then choose to proceed with that partner to sell their policy, or seek offers from others to try to get a higher value. Once the policyholder gets an offer they deem satisfactory, the third party will create a closing package of documents to sign that finalizes the agreement. The insurance carrier is then notified of the change in ownership for the policy, and an escrow agent releases a lump-sum cash payment to the person who sold the policy.
In total, the life settlement transaction process consists of eight steps and the time it takes varies from case-to-case. Typically, you can expect the process to take anywhere from 2-4 months. Here’s a more detailed explanation of each step in the life settlement process:
1. Application
In general, you must be at least 70 years old to qualify for a life settlement. Younger policyholders with a chronic or terminal illness may be eligible for a viatical settlement.
2. Documentation
In general, you must be at least 70 years old to qualify for a life settlement. Younger policyholders with a chronic or terminal illness may be eligible for a viatical settlement.
3. Review
In general, you must be at least 70 years old to qualify for a life settlement. Younger policyholders with a chronic or terminal illness may be eligible for a viatical settlement.
4. Policy Match
Once your application and medical records have been reviewed, your policy will be matched with potential life settlement providers, with the goal of finding you the best price for your policy.
5. Offer
After analyzing the value of your life insurance policy and determining it to be a good investment, a life settlement provider will make an offer. You then have the right to either accept or decline the offer.
6. Closing Package
If you accept the purchase offer, the life settlement provider will assemble a package of documents that includes a purchase and sale agreement. You and your originally designated beneficiaries will sign the documents, which the life settlement provider will co-sign.
7. Notification
The life insurance carrier receives written notice that the life settlement provider is now the owner and beneficiary of the policy.
8. Funds Transfer
After receiving written verification of the policy’s change in ownership and beneficiary, the escrow agent – which holds the settlement payment in trust until the sale is finalized – releases the money to you.
What Makes Harbor Life Settlements Different From Other Companies?
If you’re exploring the possibility of selling your life insurance policy, consider the advantages of choosing Harbor Life as your life settlement company.
- Harbor Life will provide you with a free estimate of your policy’s value.
- Harbor Life offers up to 60% of your policy value in cash, with no hidden fees and payouts, within weeks of approval.
- Harbor life will buy your policy in as little as 10 days, while other life settlement companies can take as long as six to nine months.
Life Settlement Definitions to Know
Face value
The face value is the stated dollar value of the life insurance policy, an amount that equals the policy’s death benefit.
Death benefit
A death benefit is the payment the beneficiary of a life insurance policy receives upon the death of the insured person.
Cash surrender value
The cash surrender value is the amount the insurance company pays a policy owner who voluntarily cancels, or surrenders, the policy. The cash surrender value is usually determined by subtracting a fee for the insurance company’s administrative costs from the policy’s current cash value, a figure that equals the policyholder’s accumulated premium payments plus any investment growth.
Viatical settlement
A viatical settlement is a type of financial arrangement available exclusively to life insurance policyholders with a chronic or terminal illness. It allows the policy owner to exchange an asset that is no longer useful for needed cash. The seller of the policy receives a cash amount that is less than the policy’s face value, while the buyer will receive the full death benefit when the insured person dies.
Life Settlement Provider
In a life settlement, a provider is a third-party investor or organization that purchases a life insurance policy.
Life Settlement Broker
A life settlement broker works with several providers to get multiple offers for the policyholder, which raises the sale value.
Life Settlement Companies
Life settlement companies coordinate with brokers and providers to facilitate the life settlement process.
Why Should I Sell My Life Insurance
Policy Through A Life Settlement?
Maybe you’re a retiree who’s feeling overwhelmed by ongoing healthcare costs or a sudden financial emergency, or perhaps you’d just like some additional funds for retirement living expenses.
Financial needs change over time, and this includes your life insurance policy. You may find that the policy you relied on as a security blanket earlier in life is no longer needed, or maybe it’s become too expensive to maintain in retirement. Either way, selling your policy through a life insurance settlement will yield more money than you’d get by lapsing or surrendering it.
Here are the most common reasons people pursue the life settlement option:
The policy is too expensive to maintain
If your insurance premiums have become too expensive and you can no longer afford to maintain your policy, a life settlement allows you to recoup value as opposed to lapsing and getting nothing or surrendering and receiving a smaller amount.
You no longer need life insurance
Life insurance is most commonly used as a means to provide financial security for dependents such as a spouse or children in the unexpected occurrence of your death, but once you reach a certain age it may not make sense to maintain the policy anymore.
You need funds for an unexpected expense
If you encounter an unexpected expense and urgently need money, a life insurance settlement enables you to cash out your policy early to provide financial relief. Even if you don’t have an urgent expense right now, you can sell your policy and set up an emergency savings account just in case one ever occurs in the future.
You want additional money to fund retirement
The economy is constantly changing and during retirement, many people find that they’ll need more money than they originally saved for. Rather than go back to work, lean on family members for support, or reduce your quality of living in your golden years — the life settlement option enables you to pay for living expenses and make the most of retirement by going on vacation or other activities.
Your term policy will expire soon
If you have a term policy that is expiring soon, you’ll need to decide whether you want to maintain coverage at a higher cost, get a new policy, or if you no longer want any coverage. If you choose the latter, you may be able to convert your term policy into permanent insurance and then sell it through a life settlement to recoup some of your money.
Advantages of a Life Settlement
Selling your life insurance policy can offer many lifestyle and financial benefits.
Large Cash Payment
The main draw of the life settlement option is the fact that you get a large cash payment which can be used however you’d like.
The money you gain from selling your life insurance policy can provide you with more funds for retirement or long-term care, more options when choosing doctors and healthcare facilities, and more opportunities to invest in assets that perform better at generating income. The money you receive for your life settlement can be used for anything you choose and provides many people with peace of mind.
No More Insurance Premiums
In addition to the cash payment you get from a life settlement, you also save money by no longer having to pay insurance premiums. As you get older, premiums may become unaffordable to the point where you can no longer maintain coverage.
If you are considering lapsing or cancelling your policy, a life settlement enables you to recoup money from it as opposed to getting nothing with those options. It also provides a significantly higher cash payout than you would get by surrendering it.
Who Qualifies for a Life Settlement?
To verify your eligibility for a life settlement, the best approach is to contact a life settlement company like Harbor Life Settlements. However, to get a base idea of whether you qualify you should check these factors:
1. Policyholder Age: In general, you must be at least 70 years old to qualify for a life settlement. Younger policyholders with a chronic or terminal illness may be eligible for a viatical settlement.
2. Policy Value: The face value of your life insurance policy must be at least $50,000 or more to qualify for a life settlement.
3. Policy Type: Not all types of life insurance policies are eligible for a life settlement. To qualify, you must hold a whole, universal, variable, or convertible term policy.
4. Policy Age: You must own a life insurance policy for anywhere from 2-5 years before selling it. The amount of time you need to wait depends on the state you live in, as each state has its own waiting period.
If you are unsure whether you qualify for a life settlement, contact us to determine your eligibility and receive a free estimate on the value of your policy.
The Roles Life Settlement Brokers and Providers Play
Pursuing the life settlement option requires a lot of work and expert knowledge of the industry which is why most people choose to work with a third-party expert rather than doing it themselves. When doing so, you can choose to work with a life settlement broker or life settlement provider.
What Do Life Settlement Brokers Do?
Life settlement brokers represent you, and work to get you the highest possible value for your policy by presenting it to a network of buyers.
Life settlement brokers are third party companies or individuals who present your policy to their network of buyers to get several offers resulting in the highest possible value for your case. They represent you and get paid a commission based on how much your policy is sold for, so it’s in their best interest to negotiate a higher price.
Brokers are working for you and will seek several offers while negotiating with investors to sell it for the maximum amount. When working with a life settlement broker, you’ll likely work with the same agent throughout the entire process which also means you’ll get more personalized service.
What Do Life Settlement Providers Do?
A life settlement provider is a third-party investor or company that aims to purchase life insurance policies for the lowest possible amount.
In basic terms, life settlement providers are investors or companies that purchase life insurance policies and provide a payment to the policyholder. The ultimate goal of a life settlement provider is to buy your policy for the lowest possible amount so they can increase their own profits from collecting the death benefit upon your passing.
As such, it’s not typically recommended to work with a life settlement provider because they represent their own interest instead of yours. If you do choose to work with a provider, you’ll only receive a single offer as opposed to multiple that you would get by working with a life settlement broker.
Need to Sell Your Life Insurance Policy?
Life Insurance Settlement Misconceptions
As noted above, this simply isn’t true. The right to sell your life insurance policy through a life settlement has been granted to you by the Supreme Court in the 1911 case Grigsby v. Russell. Furthermore, life settlements are regulated in 43 states with statutes designed to protect policyholders.
Myth #2: “There are rules on how you’re allowed to spend the money”
The money you receive from a life settlement can be used however you choose. You may decide to pay off debt, cover urgent expenses, or simply use the funds to enjoy a better retirement through frequent vacations.
Myth #3: “Only terminally ill people qualify for a life insurance settlement “
This is a misconception, as these people are thinking of viatical settlements which are exclusively for people with a chronic or terminal illness. Even without a severe illness, you may qualify for a life settlement assuming you meet the other criteria noted above.
Myth #4: “You can’t sell a term policy through a life insurance settlement “
This is technically true, but what many people don’t realize is that they may be eligible to convert their term policy into an eligible form of permanent insurance which can then be sold through the life settlement transaction process.
Myth #5: “You can get more money by surrendering your policy “
This is absolutely not true, as the cash value you get from selling your policy through a life settlement is typically two to four times as much as you’d get by surrendering it to the insurance company.
Knowledge is Power
Life Settlement Laws & Regulations
Most U.S. states, along with the territory of Puerto Rico, have enacted regulations of life settlements to help protect consumers. State departments of insurance are typically in charge of enforcing those rules. In each state where regulations exist, there is a waiting period of two to five years before it can be sold (some exceptions apply). The laws also require transparency throughout the life settlement process so the policyowner understands the potential benefits, risks, fees, and alternatives to life settlements.
Who Buys Life Insurance Settlements?
This is a question we see often. It’s important to understand that “life settlement” refers to the process by which a life insurance policy is sold. That is to say, nobody buys life settlements, they buy life insurance policies. With this in mind, the more accurate question is “who purchases life insurance policies through the life settlement transaction process?” The answer is that life settlement providers purchase the policies to add to their investment portfolio, or on behalf of institutional investors.
Is a Life Insurance Settlement Taxable?
Yes, life settlements are taxable in the United States. If you sell your life insurance policy in a life settlement, you will owe taxes on the difference between the payment you received from the buyer and the total amount you’ve paid in insurance premiums during the entire life of the policy. Any additional value to the policy that is not accounted for by your monthly premiums will also be taxed. The money you receive for a life settlement will be taxed as ordinary income, not as capital gains.
Life Settlement Options
The life settlement solution comes in several forms; here’s an overview of the most popular life settlement options:
Traditional
In the traditional version of a life settlement, the policyholder sells their policy to a third-party buyer or company for a lump cash sum that they can use for whatever they desire. The buyer then assumes full ownership of the life insurance policy including responsibility for all future monthly premiums. The policy is not canceled, but the insureds beneficiaries do not have any legal rights to the money paid out after the death of the insured. When the original policyholder passes away, the buyer of the life insurance policy collects the policy’s full death benefit of the policy.
Viatical
A viatical settlement is essentially the same as a life settlement, but only available for someone with a chronic or terminal illness. This option is enables policyholders to quickly get the money they need to cover medical expenses and make the best of whatever time they have left. The value of a viatical settlement is typically greater than a traditional life settlement because of the shorter life expectancy. Unlike traditional life settlements, there is no minimum age requirement for a viatical settlement, most are not subject to federal income tax.
Retained Death Benefit
In a retained death benefit life settlement the insurance policy owner does not receive any money. This type of life settlement has the investor assume the monthly payments of the life insurance premiums but doesn’t pay the seller any cash directly. This type of life settlement is sometimes used when the policyholder can’t afford the monthly premiums. Upon the death of the policyholder, a portion of the policy’s death benefit will be paid to the investor, while the remaining portion is retained for the designated beneficiaries.
The Life Settlement Solution: History and Big Events
Three historical events played pivotal roles in the creation and growth of the life settlements industry:
1. Grigsby v. Russel This 1911 U.S. Supreme Court decision established the legal precedent for life settlements by ruling that life insurance policies are like any other type of personal property in which the owner has the right to sell it should they choose to do so. The court’s decision set the legal foundation for the later development of the life settlements industry.
2. Birth of Viatical Settlements It was the U.S. AIDS epidemic in the 1980s that really provided the push for the life settlements industry to emerge through the creation of viatical settlements. Terminally ill people diagnosed with AIDS sold their life insurance policies to pay for their treatment. As viatical settlements gained popularity, so did awareness regarding the life settlement option.
3. Health Insurance Portability and Accountability Act (HIPAA) Congress passed the Health Insurance Portability and Accountability Act in 1996 and then-President Bill Clinton signed it into law. HIPAA gave insurance policyholders and beneficiaries the right to transfer ownership and/or beneficial interest to a third party which made the legal standing of life settlements even stronger than before.
How Much is My Life Insurance Policy Worth?
Whether the settlement provider offers to purchase your life insurance policy, and how much they offer, will depend on an assessment of its value.
To calculate the value of your life insurance policy, they will look at your life expectancy, the total amount of the expected future premiums and the amount of the policy’s death benefit. If you’re curious about the value you could receive from a life insurance settlement, contact us for a free estimate on the value of your policy.
Risks of a Life Settlement
While the potential advantages of a life settlement are substantial, it’s not the right choice for everyone. Making an informed decision means being aware of the possible disadvantages.
No Death Benefit for Beneficiaries
Taxes and Fees
Finally, the fees and taxes associated with life settlements constitute financial risks that can potentially reduce the rewards you gain from selling your policy. Transaction costs may include a broker’s commission and a provider’s fee. The proceeds from the sale of a life insurance policy are taxable in most cases, so that’s another likely expense that will affect your net gain. The good news is that life settlements are taxed as ordinary income rather than at the higher rate for capital gains.
Get Started With the Life Settlement Transaction Process
If you are interested in pursuing the life settlement solution, Harbor Life Settlements can guide you through the entire process and help you maximize the value for your policy. We’ll start by answering any questions you have about life settlements, then verify your eligibility and provide a free estimate on the cash value of your policy. You have the option to back out at any point, but should you choose to continue with the life settlement option — we’ll take care of all the work and help you get the highest amount for your policy.
To get started with the life settlement transaction process, contact us today and discover how much your policy is worth!
