A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement transaction, the policy’s owner transfers ownership of the policy to the buyer in exchange for an immediate cash payment and, in some instances, a reduced interest in the death benefit for the policy’s beneficiaries. The buyer of the policy pays all future premium payments and receives the death benefit upon the death of the insured (when the policy matures).
A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is 24 months or less.
Many American seniors—typically those 70 years of age or older—are discovering that life insurance policies that once seemed appropriate, have become unaffordable or no longer meet their needs.
As a result, many of these seniors lapse or surrender their policy back to the insurance carrier. In fact, policies with more than $100 billion of face value are lapsed by seniors over age 65 each year, mostly because they are unaware an alternative may be available – including the sale of the policy.
Who Can Help?
It's always best to work with members of the Life Insurance Settlement Association (LISA). Member firms are qualified in all areas of the life settlement industry; however, to start the sales process of your policy you need to work with a licensed life settlement broker or provider.
- Life settlement brokers provide an important function of guiding a policy owner through the sales process, including assembling the needed information to complete the sale. In addition, they seek competitive offers for a policy and provide guidance regarding the offer that best meets the needs of the client.
- Life settlement providers purchase policies either through a life settlement broker or directly from consumer clients for either their own account or on behalf of an investment firm. State regulations require that all policies are sold through a licensed life settlement provider.
- Law firms, medical underwriters and other intermediaries serve specific needs involved in the settlement process.
LISA members annually attest to adhering to a Code of Ethics and Standards of Professional Conduct.
Life insurance provides a very important function against the financial loss due to an unexpected premature death of an insured, whether it be a family member, business partner or key individual. Selling a policy should only be considered if it serves as the best alternative to lapsing or surrendering back to the insurance carrier.
When considering a life settlement, always consult with your financial advisor, accountant and/or tax attorney. There are tax consequences from selling your policy that are important to understand.
Alternatives to Selling A Policy
Most seniors are not aware there are alternatives available to lapsing a policy that is no longer needed or affordable. Insurance companies do not inform their policyholders that options are available to lapsing or surrendering a policy. Six states in the U.S. currently have some version of a Consumer Disclosure Law that requires insurers to notify seniors of alternatives.
Alternatives to lapsing a policy include:
- Keep the policy in-force through some type of loan or premium payments from the cash surrender value.
- Seek an accelerated death benefit, if available due to special circumstances.
- Assign or gift the policy to a charitable organization.
- Convert the policy to one with a lesser death benefit, or in the case of a term policy convert to some kind of permanent insurance.
- Sell the policy as a life settlement.
In all cases, when considering lapsing or surrendering a policy, seek the guidance of a professional advisor or expert to take advantage of the options available that best meets your needs.
- Contact your personal tax advisor, as there are tax implications when selling a policy.
- The proceeds from selling a policy may be subject to claims of creditors.
- Certain consumer disclosures are required when selling a policy. Different state laws apply depending on where a policy owner resides.
- Receipt of proceeds may adversely affect your eligibility for Medicaid or other government benefits and entitlements.