Life Settlement Considerations

A life settlement differs from a viatical settlement, which is a sale of a life insurance policy to a third party by a terminally ill insured person. With a life settlement, the insured person’s health is fine or just beginning to decline.

There are many reasons why a person may sell his or her life insurance policy, but the most common is a need for immediate cash. Although life settlements have become a common financial planning tool, they have also become an avenue for fraud or scams focused primarily on seniors.

Many state insurance departments regulate the viatical settlement market, including life settlement transactions.

LIFE SETTLEMENTS

A life settlement is when a person insured by a life insurance policy sells his policy to a third party, often an investment company. The investment company pays a percentage of the policy’s value in a lump sum cash transaction to the insured. The company becomes the beneficiary of the policy, meaning it pays future premiums and collects the death benefit when the insured individual dies.

In deciding whether to purchase the policy from an insured, the investment company considers the policy’s value, the insured person’s age and health, and the amount of premiums payable to keep the policy in force.

Life settlements differ from viatical settlements, in which the insured person selling his policy is terminally ill. With a life settlement, the insured person is either healthy or recently experienced a decline in health.

Reasons to enter a Life Settlement

There are numerous reasons a person may decide to sell his or her life insurance policy. The most common is a need for immediate cash. Some reasons a person may want to sell his policy include the following:

  1. the policy is no longer needed or wanted
  2. to pay medical bills
  3. the premiums are unaffordable
  4. no beneficiary (e. g. , beneficiary dies and the insured person has no one else in mind to make beneficiary)
  5. to receive more money than the cash surrender value of the policy
  6. there is a forced liquidation due to financial hardship or bankruptcy; or
  7. there is a change in estate planning needs.

Options

A life settlement is an alternative to surrendering a policy or letting it lapse by not paying premiums. Often a person no longer wants to the policy, even though it has monetary value. A life settlement allows the person to extract at least some value.

Alternatives to life settlements include taking a loan against the policy cash value or, if the policy has one, making use of an accelerated death benefit provision. An accelerated death benefit pays the insured person a portion of the policy’s death benefit in either a lump sum or installments. This amount is subtracted from the death benefit payable when the insured dies, but provides cash that may be needed for current expenses. Exercising and accelerated death benefit is much like entering a life settlement with the company that issued the policy.

Things to think about

Consider several questions before selling your life insurance policy:

1) Do you need life insurance protection?

2) Will you qualify for a new life insurance policy in the future?

3) Will you lose eligibility for Medicaid if you receive a cash settlement?

4) Are the broker and investment company licensed?

Selling a policy may have tax implications, creditors may be able to claim the proceeds, and the insured may have to divulge his or her health status and personal information about himself and his family to the investment company.

Because of the possibility for fraud, the seller should be sure the buyer deposits the settlement proceeds in an escrow account with an independent bank to ensure the safety of the funds during the policy transfer.

Questions about Life Settlements

I don’t have any family to leave my life insurance policy to. Do I have to be sick to collect on the policy while I’m still alive?

It is possible that you can collect on your life insurance policy in your lifetime, although you will receive only a portion of its full value.

If you are the owner and the named insured person on your policy, you may want to look into viatical and life settlements. Viatical settlements are generally available only to persons who, because of illness, have a life expectancy of no more than two years or so. Policies involved in viatical settlements often have a face amount of less than $100,000. The face amount is the amount of money to be paid to the beneficiary when the insured person dies. Life settlements often involve much larger sums of money and are considered by some to be a good financial planning tool. A relatively healthy, affluent person 65 or older with a large life insurance policy might consider a life settlement.

Before entering into a life insurance settlement transaction, discuss the matter with trusted friends and financial advisors. Don’t sell your life insurance policy if there is any possibility that you may regret it later. In addition, you’ll want to be aware of associated costs, such as payment of taxes on the money you receive. Also consider contacting your state's insurance regulatory agency to learn whether any life settlement or viatical settlement provider you are thinking of using is reputable and is licensed to do business.