The Complete Guide To Life Settlements

More and more seniors are discovering the benefits of tapping the hidden value of their life insurance policy through a life settlement. As insurance premiums creep up (or in some cases JUMP) over time, and as medical and retirement living costs do the same, life settlements can provide a qualified senior significant value.

A life settlement will free up the burdensome, ever increasing premiums, and provide an immediate source of funding that can be used however you most need.

What Exactly Are Life Settlements?

A life settlement is the sale of an in-force life insurance policy on the secondary market to a third party, where the offer is greater than the cash surrender value of the policy but less than the net death benefit. The offer can be a lump sum cash payout to the policy owner, or the offer can be structured in our Senior Care Benefit Plan professionally administered to assist with long term care costs.

The value of the policy depends on many factors including the health of the insured, the type of policy and how long ago the policy was issued, as well as how the specific policy is structured.

Life settlements are an important financial planning tool that all seniors should consider. Your life insurance is personal property that can be sold like any other property you own. A life settlement is the sale of a life insurance policy to another person or entity that does not have a familial or business relationship with you. Sometimes this could also be referred to as a “transfer for value.” When selling your insurance policy in a life settlement or viatical settlement, you receive an amount greater than the cash surrender value (if there is any) of your insurance policy. Companies that provide life settlements work with you to help you understand the entire process and determine whether your life insurance policy specifically qualifies for a life settlement or viatical settlement.

The easiest first step to determining if you may qualify for a life settlement is to explore one of the many life settlements calculators available online (click here to try our own life settlement calculator). If after entering your information in the online form, you are notified that you may qualify, there are a couple of potential next steps.

  1. Speak with one of our experts who would love to walk you through this process and answer any questions you may have. Our experts have years of experience working directly with folks like you to get them the best settlement possible.
  2. Contact a life settlement provider or a viatical settlement provider (the name depends on your state of residence). Life settlements providers (or viatical settlement provider) are licensed by the appropriate state regulatory agency ( typically, either the Insurance Department or Financial Service Department) to purchase life insurance policies from consumers.
  3. Contact a life settlements or viatical settlements broker. A life settlement broker is licensed by the appropriate state regulatory agency to represent consumers when they sell a life insurance policy. The life settlement broker will contact life settlement providers on your behalf to see if they are interested in purchasing your policy. When working with a life settlement broker you will have to pay the life settlement broker a commission for assisting you in the sales process. The fee is paid out of the sales proceeds, and no commission is paid if a life settlement is not completed.

What Is A Senior Care Life Settlement?

Our Senior Care Life Settlement option is a benefit plan which helps seniors cover their monthly long term care costs, including home care provided by a family member, independent living, assisted living, memory care, and skilled nursing. The monthly payment is adjustable and follows the senior every step of the way through their care plan. Contact us now to learn more.

How Do Life Settlements Work?

The buyer of the policy in a life settlement transaction takes over all future premium payments and becomes the new owner and beneficiary of your policy. That buyer may be an investor or institution which purchases life insurance policies through a licensed life settlement provider, or the provider may purchase the policy themselves. Once purchased, the new owner will continue paying the premiums and hold the policy to collect the net death benefit or resell the policy, individually or as part of a portfolio of life policies.

Life settlements are regulated at the state level, so be sure to check to make sure the life settlement provider or life settlement broker you are working with is licensed in your state. The state regulations provide the policy seller with important protections, including the right to rescind the transaction for a period of time, known as the rescission period (the specific time period varies by state) and privacy and data protection. During the closing, the provider establishes an escrow account with an independent financial institution that will hold your payment money and the ownership and beneficiary documents on behalf of your buyer. Once the escrow company determines that the ownership and beneficiary has been changed as detailed in the contracts, the purchase price will be paid to you or whoever you specify is to be paid. After that, you will have no need to make any premium payments as that will become the responsibility of the new owner.

Once the policy has been sold, the purchaser will have a financial interest in your life insurance policy and as such will periodically check in with you to make sure their records are up to date regarding contact information and health status.

Why Choose a Life Settlement?

Study after study portrays several misconceptions people have about their retirement years. Many believe that a nest egg can be built within a relatively short period of time, they underestimate the amount of money needed to sustain their pre-retirement lifestyle after they retire, and they imagine retiring at age 55 or 60 when the reality is that many people are working full or part-time into their 70s and beyond. If you are nearing retirement or are already there, it is time to take a hard look at your life insurance policy, which can be sold for cash to enhance an inevitable change in both living expenses and lifestyles.

Your current insurance policy may not be as suitable to your current situation as it was when you first bought it. The introduction of new and improved financial products now allows you to reevaluate your financial plan. A life settlement is one of the options many seniors are utilizing for their financial benefit to achieve a higher quality of life in the years to come.

You should look at life settlements as an option if you are a qualified senior who has a policy that is no longer wanted, needed, or affordable. Many policies lapse or are surrendered for minimal cash values, but with life settlements, policy owners receive substantially more in exchange for their existing policies.

A life insurance policy owner, you have several reasons for considering the sale of your policy. While the primary benefit of selling a policy in the life settlements market is to receive a cash payout greater than the cash surrender value of the policy, there are many secondary and underlying motives, including, but not limited to, the following:

  • A policy is no longer needed or wanted (e.g., spouse dies, divorce, children are grown up and financially responsible, etc.)
  • Changes in estate, tax or financial plans or changes in law, etc.
  • Premium payments have become unaffordable as policy owners grow older
  • Investments in the insurance are no longer appropriate
  • Disposal of unneeded “key-man” insurance or other business-owned insurance
  • Fund the purchase of new financial product/estate planning tool (annuities, life insurance or investments)
  • Charitable giving
  • Trust evaluation
  • Decline in health has increased medical expenses
  • Fear of leaving family burdened with debt
  • Alternative funding is needed for more suitable financial products
  • Changes in insurance and investment needs and/or goals
  • Policy performance does not meet expectations
  • Family/beneficiary status changes
  • Recovering assets from business-related insurance plan
  • Estate-planning needs of the insured have changed significantly
  • Satisfy the need for cash in a forced liquidation due to bankruptcy or financial difficulties
  • Liquidate policies donated to not-for-profits
  • Change in a company’s management
  • 1035 exchange for new life insurance policy
  • When loans need to be paid off
  • When you want access to the value of your life insurance

What Are The Tax Considerations?

While we cannot give tax advice, a life settlement can be can be tax-free in certain circumstances. You should consult with your accountant or tax advisor regarding the tax implications of your policy sale. Our Senior Care Benefit Plan is great for seniors who need to specifically pay for long term care needs and would like to protect future Medicaid and/or Veterans benefits eligibility, and in most cases is a tax-advantaged use of life settlement proceeds!

How Can I Find Out About Life Settlement Companies, Especially Those That Are Properly Licensed?

The best resource available for learning more about the life settlement industry and the companies licensed is the Life Insurance Settlement Association (LISA), the life settlement industry’s trade association.. LISA has excellent resources for learning more about the industry surrounding this unique market, as well as the companies that are properly licensed. Here is a link to additional educational resources from LISA.

Why Providers Of Life Settlements Buy Life Insurance Policies?

Life settlement investments are an attractive investment opportunity for institutional investors. These investments are not subject to typical market and economic cycles, and investors looking for alternative products have been flocking to this attractive option.

Glossary

  • Absolute Assignment: Re-assignment of beneficiary and owner
  • Accelerated Death Benefit (ADB): Death benefits paid to a policy owner using strict guidelines dictated by an insurance carrier as an advance, usually restricted to those with less than 12 months left to live.
  • Accidental Death Benefits: Additional benefits paid to policy owner for death by accident only.
  • Account Value: The total amount of cash built up in an insurance policy (the investment portion of the policy) that is available to the policy owner before taking into account any surrender charge (also known as Accumulation Value or Cash Value)
  • Advisor: Company or individual who provides specialized advice, e.g., tax advisor, legal advisor, financial advisor
  • Assignment: Transfer of ownership – can be as a gift, for a value, or for nothing.
  • APS (Attending Physician’s Statement): “see Medical Records”
  • Beneficiary: The individual or company named on a policy to which the insurance company will forward benefits upon death of insured
  • Broker: Company or individual assembling data on behalf of the policy owner for the purpose of selling a life insurance policy
  • Carrier: Insurance company
  • Cash Surrender Value: The Account Value built up in an insurance policy (the investment portion of the policy) that is available to the policy owner after taking into account the surrender charge (if any)
  • Contestable or Contestability Period: The time from a life insurance policy issue date in which the insurance company has the legal right to cancel a policy – usually 2 years but can vary by company and/or product. The insurance company can go back and investigate an applicant’s request for insurance based on information provided on the application. After the contestability period, a policy can only be canceled for lack of payment or fraud.
  • Death Benefit: Total amount payable to policy beneficiaries upon the death of the insured
  • Face Value: Total amount payable upon death of the insured (or insureds in a second-to-die policy), also known as the Death Benefit
  • Investor or Funder: Company that purchases a life insurance policy in the secondary market, pays all future premiums, and collects the death benefit as the beneficiary of the policy
  • HIPAA: An acronym for the Health Insurance Portability and Accountability Act of 1996 (public law 104-191) that governs the treatment of medical files by companies, among other things
  • Insured: The individual whose life is covered in a life insurance policy
  • Irrevocable Beneficiary: A beneficiary in a life insurance policy whose designation cannot be changed without his or her consent.
  • LE: Life expectancy, an estimate of the period of time a person has left to live
  • License (Provider): A state-issued designation that provides a company the legal right to purchase life and/or viatical settlements in that state – only certain states require Provider licensing.
  • Life Insurance: An asset purchased to provide financial protection should an individual (the insured) die whereby the named beneficiary will be paid a death benefit by the insurance company
  • LISA or Life Insurance Settlement Association: The most recognized trade association in the life settlement industry. LISA participates in regulatory and legislative matters in all 50 states, the District of Columbia, Puerto Rico, and Canada.
  • Life Settlement: A transaction where a lump sum cash payment is made to the owner of a life insurance policy to purchase both the rights of ownership and beneficiary designation
  • Life Settlement Provider (or Viatical Settlement Provider): Company or individual that purchases or facilitates the purchase of the rights of ownership and beneficiary designation of an insurance policy. In 29 states and Puerto Rico, a company must be licensed by the state insurance department to be a Life/Viatical Settlement Provider.
  • Life Threatening Illness: An illness that will cause premature death, e.g. HIV/AIDS, Cancer, Lou Gehrig’s Disease, Advanced Heart Disease, Liver Disease, etc.
  • Medical Records: Records provided by an insured’s doctor(s) and other medical care providers or facilities (hospitals, etc.) reflecting the insured’s medical history
  • Owner or Policy Owner: The company or individual that pays premiums and has rights to change beneficiary status and/ or reassign ownership. The Owner is not always the Insured.
  • Premiums: The periodic payment required to keep a life insurance policy funded and in-force
  • Term Policy: A life insurance policy that provides coverage for a limited number of years and expiring without value if the Insured survives the stated period, which may be one or more years, but usually is 5 to 30 years
  • Verification of Coverage (or VOC): A statement provided by an insurance company defining the current status of a life insurance policy, including relevant policy values, premium payments, and ownership status
  • Viatical Settlement: A transaction where a lump sum cash payment is made to the owner of a life insurance policy to purchase both the rights of ownership and beneficiary designation where the Insured has 24 months or less life expectancy and/or has a terminal illness (exact definition depends on specific state law)
  • Viatical: A word derived from the Latin word VIATICUM which, loosely translated, means provisions for a long journey (viaticum referred to the provisions supplied to the Roman soldiers preparing to do battle). The term has been adopted to mean the sale of a life insurance policy in the secondary market, usually referring to a situation where the Insured is terminally ill and/or has less than 24 months to live.
  • Viator: Seller of a life insurance policy, sometimes used to refer to a policy where the insured has a 24 month, or less, life expectancy