Life Insurance Settlements: Understanding The Basics

A life insurance settlement is when a policyholder sells their life insurance policy to a third party, known as a life settlement provider, in exchange for a one-time cash payment. The life settlement provider then becomes the beneficiary of the policy and assumes responsibility for paying premiums. In a traditional life settlement, the life settlement provider will receive the death benefit payout when the former policyholder passes away. Life insurance settlements are a way for policyholders to exchange their policy for a payout, and they are often considered when the policy is no longer needed or premiums can no longer be afforded.

Life insurance settlements: the sale of an existing insurance policy to a third party

A life insurance settlement is the sale of an existing insurance policy to a third party. This third party is known as a life settlement provider. The owner of the policy sells it to the life settlement provider and receives an immediate payment in return. The life settlement provider then becomes the new owner of the policy, paying any future premiums and receiving the death benefit when the insured person dies.

The life settlement provider will generally be an institution that either holds the policy until maturity or resells it, or sells interests in multiple, bundled policies to hedge funds or other investors. In exchange for the policy, the life settlement provider will pay the owner a lump sum payment, which is typically more than the policy's cash surrender value but less than the net death benefit.

There are several reasons why someone might choose to sell their life insurance policy. The majority of people who sell their policies are older people who need money for retirement and haven't been able to save enough. Other reasons include the inability to afford premiums, the policy no longer being needed, or emergencies such as the death or illness of a family member.

Before selling your life insurance policy, it is important to consider your options and seek professional financial advice. There may be other ways to keep your policy in force, such as taking out a policy loan or reducing the amount of the death benefit to lower premium payments. It is also important to research the purchaser of the life settlement to ensure they are regulated and licensed.

The purchaser becomes the policy's beneficiary and pays premiums

When a life insurance policy is sold, the purchaser becomes the new beneficiary of the policy and assumes responsibility for paying the premiums. The purchaser will then receive the death benefit when the insured dies. This is known as a life settlement.

The life settlement provider becomes the new owner of the life insurance policy and pays any future premiums. The purchaser will pay a lump sum for the policy, and the amount will depend on factors such as the age, health, and terms and conditions of the policy. The lump sum payment is usually more than the policy's cash surrender value but less than the net death benefit.

The purchaser of a life settlement is generally an institution that either holds the policy until maturity or resells it to another investor. The purchaser assumes all responsibility for the policy, including any premium payments and will receive the death benefit when the insured dies.

The sale of a life insurance policy is a way for the original owner to receive a cash payout, which can be beneficial in cases of retirement, unaffordable premiums, or emergencies. The sale of the policy means the original owner transfers all aspects of the policy to the new owner, including any premium payments and the death benefit.

The seller receives a one-time cash payment

A life insurance settlement is the sale of a life insurance policy to a third party, known as a life settlement provider. The seller receives a one-time cash payment, which is typically more than the surrender value but less than the actual death benefit. The payment is made in exchange for the policy, with the buyer becoming the new owner and beneficiary of the policy. This means that the buyer assumes responsibility for paying any future premiums and will receive the death benefit when the insured person dies.

The amount of the one-time cash payment will depend on various factors, including the age and health of the seller, as well as the terms and conditions of the policy. While the payment is generally more than the policy's cash surrender value, it is important to note that it may be subject to tax. Therefore, it is recommended that the seller consult a financial advisor or tax professional to understand the tax implications.

The process of selling a life insurance policy typically involves the seller shopping for offers from different life settlement providers. The seller can do this themselves or hire a licensed life settlement broker to help find offers on their behalf. The seller will then need to provide information and documentation, including details about their health status, the policy, and the insurer. The buyer will evaluate this information to determine a fair value for the policy, taking into account factors such as the type of policy, premiums, death benefit, cash value, and the seller's life expectancy.

It is important for the seller to carefully consider their options and proceed with caution when selling their life insurance policy. They should understand their existing policy and the details of any life settlement offer they receive. Additionally, they should be aware of the impact of the transaction on their finances and their need for ongoing life insurance protection. Consulting a financial advisor or insurance agent can help the seller make an informed decision and ensure they have considered all available options.

Life settlements are legal in the US and are not considered STOLI

Life settlements are legal in most places in the US, although they are unregulated in some states. A life settlement is when a policyholder sells their life insurance policy to a third party, who then becomes the beneficiary of the policy. The seller receives a one-time cash payment that is more than the surrender value but less than the death benefit.

Stranger-originated life insurance (STOLI) is when a person or entity buys a life insurance policy on another individual, usually someone they don't know. STOLI is generally illegal in the US because it does not feature an insurable interest between the policyholder and the insured. STOLI policies are considered unethical as they allow people to profit from or gamble on the lives of others.

Life settlements are not considered STOLI because they involve a transfer by the policy owner. In a life settlement, the policyholder already owns the life insurance policy and chooses to sell it. On the other hand, STOLI involves a new policy being taken out with the intention of transferring it to an investor or broker. Life settlements are also handled by licensed and regulated brokers or providers, whereas STOLI may be organised by unregulated entities or individuals.

Life insurance settlements are also known as senior settlements

A life insurance settlement is the sale of a life insurance policy to a third party, known as a life settlement provider. The owner of the policy sells it to the provider and receives an immediate payment in return. The provider then becomes the new owner of the policy, paying any future premiums and receiving the death benefit when the person whose life is insured dies.

In 1911, the Grigsby v. Russell case established that a life insurance policy is an asset of value that can be sold in the secondary marketplace. However, it wasn't until the late 1980s that the sale of life insurance policies became more common, with the advent of AIDS. People with AIDS sold their life insurance policies to help cover the cost of expensive treatments. This practice became known as a viatical settlement.

By the early 1990s, the insurance industry recognized that it could offer a similar option to older adults to help with their long-term care needs and medical treatments. This is when the life insurance settlement industry was born and it has since become an important financial option for seniors.

Today, life insurance settlements are a legal option in most of the US and are regulated by state insurance commissioners. When considering a life insurance settlement, it is important to understand the existing policy, the details of any settlement offer, and how a life settlement broker is compensated. It is also crucial to be aware of the potential tax implications and the impact on public assistance benefits.

Frequently asked questions