What is a Life Settlement and How Does It Work?

If you have a life insurance policy that you no longer need or can no longer afford, you may be able to sell it for a lump sum payment through a process known as a life settlement. Here's what you need to know about how life settlements work and whether they might be right for you.

What is a Life Settlement?

A life settlement is a transaction in which a policyholder sells their life insurance policy to a third party in exchange for a lump sum payment. The third party then becomes the new owner of the policy and is responsible for paying the premiums and collecting the death benefit when the policyholder passes away.

Life settlements are typically used by individuals who no longer need their life insurance policy or who can no longer afford to pay the premiums. They may also be used by individuals who are facing a terminal illness and who need cash to pay for medical bills or other expenses such funding retirement.

How Does a Life Settlement Work?

If you're interested in selling your life insurance policy through a life settlement, here are the steps you'll typically need to take:

1. Determine whether you qualify: To qualify for a life settlement, you'll typically need to be at least 65 years old and have a policy with a face value of $100,000 or more. You'll also need to have a life expectancy of 2-10 years or less, depending on the policy and the buyer.

2. Get an appraisal: To determine the value of your policy, you'll need to get an appraisal from a qualified life settlement provider. The provider will evaluate your policy based on factors like your age, health, and life expectancy, as well as the premiums, death benefit, and other terms of the policy.  An official appraisal differs from a estimate, however we invite you our policy value calculator to see if requesting an official appraisal makes sense. 

3. Find a buyer: There are two types of buyers: Direct Consumer Life Settlement Providers and Life Settlement Brokers. If you choose the DIY path, then you'll be working with a "Direct Consumer Provider." You'll be responsible to handle all aspects of the transaction including: negotiations, paperwork, and research. In contrast, if you choose to work with a "Life Settlement Broker," you'll have a experienced professional representing you to multiple buyers and handling all aspects of the transaction. There are pros and cons to each approach and it'll be important that you learn about them before making your final decision. 

4. Complete the sale: If you find a buyer who is willing to purchase your policy, you'll need to sign a contract and transfer ownership of the policy to the buyer. You'll then receive a lump sum payment in exchange for the policy.

Is a Life Settlement Right for You?

Whether a life settlement is right for you will depend on a number of factors, including your financial situation, your health, and your long-term goals. Here are some pros and cons to consider:

Pros:

• Cash payment: A life settlement can provide you with a lump sum payment that you can use to pay for expenses like medical bills, long-term care, or other costs.
• No more premiums: If you're struggling to afford the premiums on your life insurance policy, a life settlement can eliminate that ongoing expense.
• More control: By selling your policy, you gain more control over how your money is used and can ensure that it goes towards your own needs or the needs of your loved ones.

Cons:

• Reduced death benefit: If you sell your policy through a life settlement, you'll no longer be eligible for the full death benefit of the policy. This could be a disadvantage if you were counting on that benefit to provide for your loved ones.
• Tax implications: Depending on the details of the sale, you may be subject to taxes on the lump sum payment you receive.
• Reduced flexibility: Once you sell your policy, you no longer have the option to change your mind or access the death benefit if your circumstances change.

Conclusion: