Life insurance is one way that you can financially support your loved ones after you die, but many do not realize that your policy is considered property, meaning it can be sold. This transaction is known as a life settlement.
A life settlement is a great way to get cash in return for a life insurance policy that is no longer serving you. Older adults who are struggling to pay their bills, such as expensive long-term health care costs, can benefit from this much-needed lifeline.
What is a life settlement?
As you now know, a life settlement is the transaction of selling a life insurance policy back to the policy owner, or to a third party. While the seller typically gets less than the amount of the death benefit, the cash surrender value is usually more. It works by the third party continuing the policy premium payments and then they get to collect the death benefit when the insured dies.
The ruling of the 1911 Supreme Court case Grigsby v. Russell set the precedent that life insurance is considered private property. Fast forward to the 1980s when the AIDS epidemic created a market for terminally or chronically ill patients to transfer ownership of their life insurance policies by selling to a third party in what was known as a viatical settlement.
However, during the days of the viatical settlement industry, fraud became an issue as people would apply for life insurance policies before getting tested for HIV and then sell their policies after a diagnosis. Now, the life settlement industry is more heavily regulated. Most states require a two-year period from the policy issuance to when it can be sold.
Can you sell your life insurance policy?
Your age and health are key components of qualifying for a life settlement. In most instances, investors only want to take on the risk of buying your policy if you are old enough or sick enough. 75 years of age is the average for people who sell their policies. Typically, you must be at least 65 years of age, unless you have a serious health issue.
There are many existing state statutes that require policy owners to be either terminally ill with a life expectancy of less than two years or chronically ill with the inability to perform at least two daily living activities in order to qualify for a life settlement.
When you should consider a life settlement
If your need for cash is greater than your need for supplying a life insurance payout to your beneficiaries, than a life settlement makes sense. There are many reasons why someone might choose to go this route, such as grown children who no longer count on support from you, expensive long-term care costs or even if you can’t pay your life insurance bill. Its much smarter to get market value for your policy as opposed to letting it lapse.
Typically, people can get four to 11 times the amount of cash surrender value of a policy with a life settlement. There are also many state statutes that require the amount of a life settlement exceed a policy’s accelerated death benefit. This is a portion of the death benefit that the insured had the ability to access while living if they are diagnosed with a terminal or chronic illness. It is also possible to sell only a portion of your policy. This way, your beneficiaries will still get some payout after you die.
Types of policies that can be sold
Term life policies and permanent life policies can be sold; however, investors tend to prefer the option to convert a term life policy to permanent as not to risk the insured outliving the length of the policy.
Many of the types of policies that are sold are known as universal life insurance policies. These are commonly sold since premiums tend to be lower, it appeals to investors. And, with lower premiums, policy owners are sometimes unable to pay enough to keep their policies in force, making the perfect candidate for a life insurance settlement.
How to get a life insurance settlement
Typically, selling a life insurance policy is handled by brokers that are licensed to have a fiduciary duty to represent the policy owner. The goal is to get policy owners the maximum price possible by auctioning for bids.
Brokers get a commission since they do your comparison shopping, which is either 8% of the face amount of 30% of the life settlement payment, whichever is lower. Commissions vary by broker, so make sure you have that conversation before deciding to sell your life insurance policy.
You will need to fill out an application with information on your policy and provide consent to release any medical or prescription records. After that is done you are all set to start receiving offers on your policy.