Understanding Life Settlements: What You Need to Know
Buying life insurance is a long-term financial commitment, but circumstances can change. If you’re unable to pay premiums or no longer need coverage, you might be able to sell your policy in a life settlement. This process involves selling your life insurance policy to another person or company for less than its death benefit value.
Key Terms Explained
- Cash Value: The portion of a permanent life insurance policy that grows over time and can be used for withdrawals or loans.
- Cash Surrender Value: The amount received when surrendering a permanent life insurance policy. It’s based on the cash value and administrative fees.
- Death Benefit: The payout to beneficiaries after the insured person’s death. In a life settlement, the new owner receives this benefit.
- Life Settlement: Selling your life insurance policy for cash to another party for less than its death benefit.
- Life Settlement Broker: A professional who helps sell policies by gathering offers from providers, charging a sales commission.
- Life Settlement Provider: An entity that buys life insurance policies, pays premiums, and receives the death benefit.
Who Buys and Sells Life Insurance Policies?
Sellers are typically over 65, though younger individuals with certain medical conditions may qualify. Universal life insurance policies with death benefits over $100,000 are in high demand, though term life and smaller policies can also be sold. Institutional investors like banks and insurance companies often pool these policies.
How Life Settlements Work
The process can be handled through a broker or directly with a provider. Brokers solicit multiple bids to get the best price, while providers purchase policies directly. The steps include:
- Providing policy details and medical records
- Receiving offers from potential buyers
- Selling the policy to the buyer
- Transferring policy ownership and premium payments
- Periodic confirmation of life status
Determining Your Payout
The amount received from a life settlement depends on life expectancy, policy face amount, and expected premiums. Offers are typically between the cash surrender value and the death benefit.
Potential Pitfalls
- Difficulty determining a fair price
- Sales commissions up to 30%
- Tax implications on the payout
- Loss of death benefit for beneficiaries
- Potential impact on public assistance eligibility
Before You Sell
Consider these questions:
- Do you still need the coverage?
- Are there alternative ways to manage premiums?
- Can you trust the broker and buyer?
Selling Safely
- Find a licensed broker through your financial advisor or insurance agent
- Get multiple offers to understand your policy’s value
- Research the broker’s license status and complaints
- Don’t feel pressured to sell just because you receive an offer
Frequently Asked Questions
Can I sell my life insurance policy? Yes, if you can find a buyer. The price depends on factors like life expectancy and policy details.
How do I sell my policy? You can use a life settlement provider or broker. Brokers compare offers from multiple providers.
What are alternatives to life settlements? Surrendering your permanent policy is an option, though you may get more cash from a life settlement.
