What Is A Life Settlement Policy?

Mar.03.2021

As you get older, you may be hearing a bit about the option to get a life settlement. In this article, we’ll take you through what a life settlement is, how to get them, who provides them, and alternatives that could provide you with similar benefits. 

What Are Life Settlements?

A life settlement is a way to sell your life insurance policy and receive cash value. Usually, people start shopping around for a life settlement option when they no longer need their life insurance policy, when their beneficiaries are provided for, and when they have expenses they want to pay for. If you can no longer afford the premiums on your life insurance, have a lot of medical expenses to pay for, are looking to start a new journey through taking a trip or opening a business, or are just faced with sudden loss of income, you may want to consider a life settlement as an option. 

For the insurance policy holder, a life settlement has a lot of benefits. When you sell your life insurance, you get to take a huge portion of the premiums you have paid and the cash value it has built up over the years and the buyer takes over paying all premiums. If you’re interested in an insurance life settlement, here are a few things you should consider.

What Is A Life Settlement Provider? 

A life settlement provider is the party who pays you for your life insurance policy. A provider could be purchasing your policy for themselves or for an institutional investor, usually some kind of financial institution such as a bank. A settlement provider will be licensed by the Department of Insurance to deal in life settlements. 

A life settlement provider will help you with everything you need to complete a successful life settlement. They will help you determine your eligibility, which is based on: 

  • Your age
  • Your life expectancy
  • The amount of your death benefit

They will also help you determine the value of a life settlement, based on factors such as:

  • Your age and life expectancy
  • The amount in premiums paid
  • The death benefit
  • The amount in premiums left to be paid

A life settlement provider will find you the best buyer, who will then pay you the value determined and take over paying the premiums on your policy. When you die, the buyer will receive the remaining benefit from your policy. 

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Investing In Life Settlements

Those who invest in life settlements must have a lot of money. In general, financial institutions, banks, mutual funds, and hedge funds invest in purchasing life settlement policies. In general, life settlement investment is a good option. Life settlements have a very stable rate of return and are tied up in insurance companies, which are more secure than many other investment opportunities tied up in the market. Plus, because seniors want to sell their life insurance policies, investing in life settlements makes it a win-win situation for everyone involved. 

There are a few options for investing in life settlements:

  1. Buying a life insurance policy. This is only possible if you have a large amount of cash on hand and know a lot about insurance rules. 
  2. Using a direct fractional life settlement. In this case, the settlement is divided among several buyers at lower total cost.
  3. Purchasing into a private equity fund. A private equity fund consists of several policies grouped together. Investors can purchase a portion of this fund. 

Although life settlement investing is a steady option, it comes with some disadvantages. In order to purchase as an individual, you must make at least $200,000 annually, and your funds will be tied up for several years before you can cash in the policy value. In addition, some states do not offer such settlement plans and the rules regulating settlements can be complicated. 

Alternatives To Life Settlements

If you’re looking to cash out your policy but aren’t sure you want to go all the way with a life settlement, there are alternatives. It can be frightening to sell your insurance outright. Plus, there are certain qualifications: you must be at least 65 and have $100,000+ in death benefits. If you’re looking for other options, here are a few:

  1. You can withdraw cash from your policy. In this case, you might take a portion of the cash value you’ve built up in your policy and leave a portion for your beneficiaries. You will still have to pay premiums for the duration of the policy.
  2. You can take a loan from your policy–essentially, you’ll be borrowing from yourself. Interest rates will be much lower, your credit will be unaffected, and you don’t have to explain what you’re borrowing for. You could use the money for anything. 
  3. You can surrender your policy. Basically, you’ll cancel your policy and get a check from the insurance company. Keep in mind that this will be less any fees and is typically a much smaller amount than you might get from a life settlement. 

These options are all possible solutions if you’re unwilling or unable to commit to a life settlement. 

Life Settlement Services

Choosing to pursue a life settlement can be a confusing process. Thankfully, you don’t have to do it alone. There are tons of companies out there who can provide you with the services you need to make a wise decision. You can learn about market trends, cash value calculations, state or national laws and regulations, and much more when you talk to a licensed life settlement provider. 

If you’re interested in getting started, check out this free life settlement calculator or get in touch with us to see if you’re qualified and how we can help you get the money you deserve. 

Frequently Asked Questions

Are life settlements taxable?

Most life settlements are not taxable up to the surrender amount. However, you must be eligible according to the IRS and some state rules may apply.

How do providers calculate cash value?

Buyers of a policy will consider age, life expectancy, the amount in premiums they will have to pay, and the death benefit of the policy. They will then determine the overall value.

Why should I give up my life insurance policy?

If you are no longer able to afford premiums, your beneficiaries are provided for, and you need extra cash, a life settlement is a great option. 

Are there different kinds of life settlements?

There are three main types: 

  • In a viatical settlement, the policy owner must be chronically or terminally ill and need money for medical expenses.
  • In a traditional settlement, the policy owner must be 65 with $100,000 in death benefits and will sell the policy for cash.
  • In a retained death benefit settlement, the policy owner will sell part of the policy value and retain a portion to secure funds for their beneficiaries. 

What policies are eligible?

Whole life and universal life policies are eligible for life settlements.

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