Life insurance is one way that you can financially support your loved ones after you die, but many seniors are realizing that they can access their policies worth before they die. Life insurance policies are considered an asset. In other words, your property that 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. People in retirement who are struggling to pay their bills can benefit from a much-needed lifeline, but a life settlement may not be for everyone. The process is very individualized, which is why you want to ask the right questions when considering a life settlement.
What are the alternatives to a life settlement?
Seniors have been weighing the pros and cons of a life settlement, and the pros seem to outweigh the alternatives. Perhaps you have been thinking about surrendering your policy back to the insurance company? According to The American Council of Life Insurers (ACLI), you are not alone; the voluntary termination rate of individual life insurance policies reached 5.7 %in 2018. Clearly, the premiums are not worth the hassle for many Americans.
The other option you have is to let your policy lapse- something that life insurance companies prefer to happen. In this case, the policy terminates. When a policy lapses, you lose coverage, meaning no death benefit. You do not get any money out of the policy. All those premiums go to the life insurance company.
The Life Insurance Settlement Association (LISA ) reported that American seniors miss out on 112 billion dollars each year by lapsing or surrendering their policies. This is why more seniors are opting for a life settlement. In recent years they have had more exposure to the secondary market. Increased awareness has left policyholders wondering why they should settle for less when this third option exists?
Why should I consider a Life Settlement?
If you settle for the other options, you could be missing out on a handsome lump sum of cash because a life settlement can get you significantly more cash value than surrendering. It is well known that you can get as much as 10x more than a policy’s surrender value. It is even a requirement in some states that the life settlement exceeds a policy’s accelerated death benefit.
The number one reason seniors consider a life settlement is that the need or desire for cash outweighs the policy’s intent. Naturally, families outgrow their life insurance policy’s intent and no longer need death benefits for their loved ones. Why continue to pay the premiums?
There are plenty of expenses that seniors can use a settlement for, such as medical expenses, living expenses, long-term care, and unexpected illnesses. The cash comes much quicker than the alternative option and provides relief.
Can I trust the Life Settlement market?
Skepticism about the life settlement market has been a significant setback for policy owners. Some seniors still have reservations based on the novelty of the market and concern about fraud.
The life settlement market was initially known for viatical settlements. The secondary market was established in the 1980s due to the AIDS epidemic. AIDS caused an offset number of people to become terminally ill in a short amount of time. Since life insurance was already established as private property, transferring ownership of a life insurance policy became possible. Getting cash for policies, however, was a new concept, making the market vulnerable to fraud. People started applying for life insurance policies before testing for HIV and then turned around and sold before diagnosis. This left a bad impression on the settlement market.
As a result, heavy regulations were put in place. People have been able to put more trust in the life settlement market. Now, not just anyone can sell their insurance policy. Most states have at least a two-year minimum time restriction of ownership before it can be sold. Brokers are also required to be licensed by most states in the U.S. The National Association of Insurance Commissioners (www.naic.org )is a site that allows you to check and confirm that who you are working with is licensed. The industry is focusing on being more transparent.
Do I qualify for a Life Settlement?
First, you have to know what kind of policy you have. Permanent life insurance policies are the most attractive to purchasers because they typically have the most value. So if you have a whole or a universal life insurance policy, you can sell it. Universal life insurance policies are purchased the most because the premium payments are so low. This is important to buyers since they assume the premium payments once they buy the policy,
Term life insurance can also be sold, but it comes with more stipulations.
To sell a term policy, you have to be terminally ill, or the policy has to be convertible to a permanent policy. Purchasers do not want you to outlive the policy they buy; therefore, the shorter the life expectancy, the better the payout.
There are three other major determining factors to qualify for a life settlement: age, health, and value of your policy.
- Are you old enough? You must be at least 65 years or older to sell your policy. The average age of a policyholder that chooses a life settlement is 75 years old.
- Where does your health stand? Has your health changed since you initiated the policy? The buyer is more likely to bid if your health has deteriorated. If you are not of age, then you must be terminally or chronically ill to sell. In other words, you are dying or incapable of taking care of yourself to a certain extent. In this case, your settlement may be referred to as a viatical settlement.
- Is your policy worth 250,000 or more? This is the minimum average amount that a buyer will take for your policy. It needs to have enough value. You can get your policy appraised to find out how much it is worth.
Broker vs. Provider- Who do I sell my life insurance policy to?
It is instinct for many seniors to turn to their life insurance providers when they do not know what to do with their policy. Policyowners are under the impression that the life insurance company they started their policy with will give them all the information they need to sell.
The unfortunate reality is that life insurance companies have no obligation to their policy owners. They typically will not discuss the life settlement option with their clients because it does not benefit them. As mentioned before, life insurance companies prefer that you let your policy lapse because that means they do not have to pay out on your policy
This lack of communication on the provider’s end is one of the reasons that very few seniors have known about life settlements. According to the Life Insurance Settlement Association (LISA), only 6 out of the 50 states require life insurance companies to notify their policy owners of any alternatives to surrendering or letting their policy lapse.
Regardless, you can sell your policy directly to a provider yourself. This takes time and care in approaching several providers to compare if you want the best value. Some seniors prefer to take this route because there are typically fewer fees involved, and they do not have to pay commission.
Brokers are a more approachable option to some seniors because they do the heavy lifting when it comes to shopping for their policy and comparing their options.
As opposed to providers, brokers have a fiduciary duty to policy owners that want to sell their policies. Their job is to get you the most value possible. However, some seniors prefer not to work with brokers because they make a commission off of the sold policy. While there may be more fees involved, your broker has more incentive to get you more money.
Regardless, when using a broker or selling to a provider, you want to make sure that your policy is in the right hands. There are a few things that you can check off of your list to protect yourself and your money.
- Confirm that they are licensed in your state. A licensed professional should be used no matter what, and you can verify this using your state insurance commissioner. This is pertinent to avoiding fraud.
- Ask what fees you are going to have to pay, upfront. Ask for a full disclosure of their transaction costs. A professional should be transparent. You do not want any surprises.
- Get clear on who exactly is buying your policy and what will happen to your policy. Why is this important? Once your policy is sold, there is a chance that your policy is resold. You may not know where your policy ends up in the end. This only really matters if there is a chance you want to buy back your policy. The life settlement market is made up of investors of all sizes.
Have confidence in the Life Settlement market
Selling your life insurance policy can be an intimidating process, but the outcome has proved to be beneficial. The mass of the industry has made life settlements a common resource for seniors to turn to. The growth of the industry has exceeded expectations over the years. And according to experts, the industry is expected to continue to grow as it is on its third consecutive year of increased settlement volume. The market has suitable capital flow to fund purchases, and many buyers are looking to take premium payments into their hands.
You have the right kind of policy, you meet the age and health requirements, your policy is worth over $250,000, and you have found the right person to sell to. You are ready to sell your life insurance policy, but no matter how you approach a life settlement, do what is best for you and your family.
Money. We could all use more of it, especially people in retirement. That is why seniors are turning to life settlements. A life settlement is the sale of a life insurance policy to a third party. The third party then takes responsibility for the premium payments and receives the death benefit initially intended for the family. Limited resources have resulted in more life settlements over the years. You have the right to sell your policy; it is an asset, and the process to do so is very individualized. That is why you want to ask yourself the right questions when considering a life settlement.