Understanding Life Settlements Part 1

Life settlements have become increasingly popular in recent years as a way for seniors to unlock the value of their life insurance policies. I've written about them in the past, but are they a good financial tool, and should you consider one?  That is the question I hope to answer for you in this three part blog. We'll begin by discussing the basics then get into the drawbacks and finally explore possible reasons you may consider one.

In this first blog post, I'll provide an overview of life settlements and how they work.

What is a life settlement?

A life settlement is a financial transaction where a policyholder sells their life insurance policy to a third-party investor. In exchange for the policy, the investor pays the policyholder a lump sum of cash that is typically higher than the policy's cash surrender value, but lower than its death benefit. The investor assumes the responsibility for paying future premiums and collects the death benefit when the policyholder passes away.

How does it work?

To initiate a life settlement, the policyholder must first determine their eligibility by working with a life settlement broker. The broker will evaluate the policy and determine its value based on the policyholder's age, health, and life expectancy, as well as the policy's premiums and death benefit.

Once the policyholder agrees to the terms of the life settlement, the broker will market the policy to potential investors. When an investor agrees to purchase the policy, they pay the policyholder a lump sum, and the policy is transferred to the investor. The investor assumes the responsibility of paying future premiums and collects the death benefit when the policyholder passes away.

Who is eligible for a life settlement?

Seniors who are over the age of 65 and have a life insurance policy with a death benefit of at least $100,000 may be eligible for a life settlement. Policies that are most attractive to investors are those held by individuals who are chronically or terminally ill or have a shorter life expectancy. A common question is "Can I sell my term policy?" While a term policy, in it's current form, is not eligible to be sold, it may contain a clause in the contract paperwork that allows it to be converted into a policy that is eligible for sale. It is important to read through, or work with a settlement broker that will read through, the fine print of your policy to determine if your life insurance is or can be made eligible to sell.

What are the benefits of a life settlement?

One of the main benefits of a life settlement is that it provides seniors with a lump sum of cash that can be used to cover expenses such as medical bills, long-term care, or debt repayment. Additionally, a life settlement allows seniors to turn their life insurance policy into a liquid asset, which can be especially beneficial for those who no longer need the policy's death benefit.

How does it differ from other financial options?

A life settlement is different from other financial options such as a viatical settlement or a loan against the policy's cash value. A viatical settlement is similar to a life settlement, but it is intended for individuals who are terminally ill and need financial assistance to cover medical expenses. A loan against the policy's cash value, on the other hand, is a loan secured by the policy's death benefit that accrues interest and may need to be repaid at a later date.

What's amount I could receive for my life insurance policy? 

One example of a successful life settlement involved a 75-year-old policyholder who had a $1 million life insurance policy with an annual premium of $24,000. The policyholder no longer needed the death benefit and was struggling to keep up with the premiums. The policyholder worked with a life settlement broker and was able to sell the policy for $300,000, which provided immediate financial relief. If you want to read about other's that have benefited from a Life Settlement you can find a few stories on our website.

In conclusion, a life settlement can be a valuable financial tool for seniors who want to unlock the value of their life insurance policies. It provides a lump sum of cash, which can be used to cover expenses or invested to generate income. It is important to work with a reputable life settlement broker to ensure that you receive fair value for your policy. However, it's also important to consider the potential drawbacks and risks associated with life settlements, such as the tax implications and the possibility of scams or fraud.

In the next blog post, we'll delve deeper into the potential pitfalls of life settlements and provide tips for how to avoid them. Stay tuned to learn more!"

Read Part 2 "Avoiding Pitfalls: What to Watch Out for with Life Settlements"

Read Part 3 "Why a Life Settlement Might Be the Best Financial Decision You Can Make"