What is a Life Settlement?
Imagine you have a life insurance policy that you want to cash out on early. This is how the life settlement transaction process works.
A life settlement (also known as a life insurance settlement) is the sale of a life insurance policy by its owner to a third party. The seller receives a lump sum cash payment that is greater than the cash surrender value of the policy but less than its death benefit. The buyer assumes payments of future premiums and receives the policy’s death benefit when the insured person dies.
Life Settlement Definitions to Know
The face value is the stated dollar value of the life insurance policy, an amount that equals the policy’s 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.
A viatical settlement is similar to a life settlement, but is exclusively available for life insurance policyholders with a chronic or terminal illness. Viatical settlements typically award a higher cash value than life settlements because of a shorter life expectancy for the policyholder.
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:
1. 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.
2. 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.
3. Your 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.
4. 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.
5. 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.
Why sell your Life Insurance?
Advantages of a Life Settlement
Selling your life insurance policy can offer many financial benefits.
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, and are no longer responsible for paying insurance premiums. 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.
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
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.
With most types of life settlements, perhaps the biggest drawback is that your life insurance policy’s beneficiaries won’t receive any money from policy after your death. If you are enrolled or planning to enroll in Medicaid, the money you get from the life insurance settlement may put you over the program’s asset limit making you ineligible. Furthermore, those with delinquent debt should note that creditors may claim proceeds from the life settlement transaction.
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.
Life Settlement Options
The life settlement solution comes in several forms; here’s an overview of the most popular life settlement options:
In the traditional version of a life settlement, the policyholder sells their policy to a third-party buyer for a lump cash sum. The buyer assumes full ownership of the policy including responsibility for all future premiums. When the original policyholder passes away, the buyer collects the policy’s full death benefit upon the death of the person insured by the policy.
A viatical settlement is essentially the same as a life settlement, but is only available for someone with a chronic or terminal illness. This option is designed to enable 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 with traditional life settlements, there is no minimum age requirement for a viatical settlement, and most are not subject to federal income tax.
Retained Death Benefit
In this type of life settlement, the investor assumes the payment of your life insurance premiums but doesn’t pay you any cash directly. A portion of your policy’s death benefit will go to the investor, while the remaining portion is retained for your original beneficiaries.
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.
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.
Life Settlement Transaction Process
The life settlement transaction process consists of several steps and the time it takes varies from case-to-case. Typically, you can expect the process to take anywhere from 2-4 months.
When working with a life settlement company, here are the steps involved:
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.
Along with your application form, you will furnish the life settlement company with your medical records or a list of health care providers who can supply them.
The life settlement company reviews your application and sends your medical records to an independent life expectancy underwriter for an assessment to help determine how much your policy is worth.
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.
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.
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.
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 drive up the price by seeking several offers and 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. Furthermore, 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.
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. Russell
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)
Congressed 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.
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 (with a few exceptions by circumstance). The laws also require transparency throughout the life settlement process so the policyowner understands the potential benefits, risks, fees, and alternatives to life 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.
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.
Is a Life Insurance Settlement Taxable?
If you sell your life insurance policy, you will owe taxes on the difference between the payment you receive from the buyer and the total amount you’ve paid in insurance premiums. Any additional value to the policy that is not accounted for by your monthly premiums will also be taxed. Again, the money will be taxed as ordinary income, not as capital gains.
Life Insurance Settlement Misconceptions
Myth #1: Life insurance settlements aren’t legal or regulated
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.
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!
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What Makes Harbor Life Settlements Different?
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.