What is a Life Settlement?
What is a Life Settlement?
Life settlements denote the action of selling an insurance policy related to one’s life to an interested third party. The form of the payment can be cash, a new policy that doesn’t demand future premiums, or a mix of both. The total sum of cash received is greater than the policy’s cash surrender value but less than the death benefit. Essentially, a life settlement serves as an alternative to a lapse or surrender.
Essential Life Settlement Terminologies
- Life settlement – This is the act of selling a life insurance policy to a third-party buyer, usually in exchange for cash.
- Face value – The declared dollar sum that beneficiaries will obtain upon the death of the policy owner. This amount is fixed at the time of policy issuance.
- Death benefit – The same as the face value. It’s the money that beneficiaries will receive when the policy owner dies.
- Premium – The money payable to the insurance company, usually monthly or annually, to keep the policy in force.
- Cash surrender value – The money an insurance company will pay to a policy owner for policy cancellation before it fully matures.
- Viatical settlement – A kind of life settlement accessible only for policyholders with a chronic or terminal disease.
How Life Settlements Work
When policy owners find their life insurance policy unaffordable or unnecessary due to financial changes, they can now sell their policy to a licensed provider, often institutions like Canadian Life Settlements. The owner effectively shifts the policy’s ownership to the buyer in return for a payment larger than the surrender value but smaller than the total death benefit.
The buyer will assume all premium responsibilities and will receive the death benefit when the insured dies. If you need to keep some coverage, you can sell or trade in a part of your existing policy and keep a percentage of the total death benefit with no future premium obligations, an operation known as a Retained Death Benefit.
Candidates usually aged seventy or older and owning a policy with a face value of $100,000 or more are likely to qualify. Eligibility may vary depending on factors such as the policy’s size and type, the age and health of the insured, and the buyer’s needs.
Life Settlement Options
Life settlements are not a single financing option, they come in various forms. After deciding to sell a life insurance policy, policy owners have to determine which type of life settlement to go for. This decision hinges on several factors like the insured person’s health and their dependents’ need for the policy’s death benefits. In this section, you will find all the information to distinguish among the two main life settlement options.
Standard Life Settlement
A standard life settlement is typically the first option that comes to mind when contemplating the sale of your life insurance policy. This kind of sale is accessible to anyone who owns a policy with $100,000 or more in death benefits. Usually, sellers are senior citizens looking to supplement their retirement income. By selling their life insurance via a standard life settlement, they can receive a substantial payout during their lifetimes, or a series of payouts to secure income for the rest of their lives.
The timeline for this type of life settlement primarily depends on the speed with which the policy owner and the insured can arrange the transfer of medical and insurance information to the life settlement provider. Promptly working with your insurance company and physician to send the required details to the provider can help expedite the standard life settlement process.
Retained Death Benefit
While both standard life settlements and viatical life settlements involve surrendering the full death benefit for a substantial payout, a retained death benefit (RDB) settlement lets policy owners retain a portion of these benefits without future premiums. By essentially sharing the life insurance benefits with an investor, the policy owner can avoid hefty premiums and still retain some of the death benefit, albeit at a reduced amount.
A retained death benefit settlement does not have special health qualifications and offers the opportunity to merge the benefits of a standard life settlement with those of life insurance—providing a potential cash payout to the holder, terminating future premium payments, and leaving some coverage for beneficiaries.
If the insured person wants to lessen the burden of retirement costs while still leaving some money to their loved ones, a retained death benefit settlement might be the right choice. Check if you qualify for retained death benefits today.
Steps in the Life Settlement Process
The policy evaluation process involves collecting information about the policy and the insured to ascertain whether the policy economics are suitable for a life settlement. The process usually follows these steps:
- Initial Vetting: In this stage, we invite potential policy sellers to provide their contract and health information. This allows us at CLS to verify important details such as the applicant’s age, health status, and specifics of their insurance policy including type and premiums.
- Application Process: We proceed to request preliminary data from the policyholder. If there are any medical issues present, we will send additional forms to gather the necessary related information.
- CLS Review: At this point, we calculate the policyholder’s life expectancy using established actuarial methods. This data is then used to determine a range of possible offers.
- Offer: After assessing the data, we communicate our offer to the policyholder or their financial advisor. If the initial verbal offer is accepted, we will send an official Offer to Purchase.
- Acceptance of Offer and Closing: Once the offer is accepted, we collect the signed Life Settlement Agreement (LSA). This is the stage where all required CLS and insurance carrier documents are completed, including any forms needed for changes of beneficiary, ownership, or collateral assignment.
- Funds Transfer: Upon written verification, funds are transferred to the client. The policy owner confirms receipt of the payment and sends a signed confirmation back to CLS to finalize the process.
History of Life Settlements
The groundwork for life settlements can be traced back over 100 years to a 1911 decision by the U.S. Supreme Court. The court ruled that life insurance is an asset that can be sold. The case centered around Dr. A.H. Grigsby’s purchase of Mr. John C. Burchard’s life insurance policy for $100 to enable Mr. Burchard to fund a medical procedure.
Several years after Mr. Burchard’s death, Dr. Grigsby’s claim for the policy’s death benefit was disputed by Mr. Burchard’s executor, Mr. R.L. Russell. Despite Mr. Burchard winning his challenge in a lower court, the U.S. Supreme Court ultimately ruled in Dr. Grigsby’s favor.
“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner ’s hands.” – U.S. Supreme Court, Grigsby v. Russell, 1911.
Nearly eight decades later, as the AIDS epidemic gripped the United States, the concept of cashing in on life insurance policies reemerged in the form of viatical settlements. While viatical settlements allowed numerous AIDS patients to cash out their policies, it wasn’t until Coventry introduced the term “life settlements” in the late 90s that the industry truly came into its own.
Today, life settlements are regulated in 43 states and Puerto Rico, with more than 90% of Americans residing in states with life settlement regulations. As per The Deal, a business intelligence and news service, 2018 saw a 28% increase in the number of policies sold.
For more details on the history of life settlements, please refer to:
- Life Insurance Settlement Association
Reasons to Sell Your Life Insurance Policy & Consider a Life Settlement
As financial needs evolve, so does your need for life insurance. A policy that was once a perfect fit may now have become a liability, now that your children are self-sufficient, you’ve outlived your beneficiary, or the policy has simply become unaffordable.
There are numerous reasons policy owners choose to sell their policy. Most commonly, it’s because the policy owner’s current financial situation necessitates liquidity over coverage. Here are some reasons why policyholders choose a life settlement:
1. The policy is no longer required
Life circumstances change, and so should your financial plan. As your children gain financial independence, your estate needs change, your lifestyle shifts, or your budgeting needs take precedence, maintaining a policy that’s no longer necessary may not make sense.
2. The policy is too costly
Over time, life insurance premiums can become prohibitively expensive for many, making life settlements a great alternative to surrender or lapse. Life settlements, on average, yield four times more money than you’d get from the cash surrender value.
3. You have new unexpected expenses
Life is unpredictable, and unexpected financial challenges can crop up out of nowhere. If you’re faced with unforeseen financial burdens or if you simply prefer immediate cash over future coverage, a life settlement can provide a quick cash infusion.
4. You desire a better retirement
Market fluctuations have significantly affected many seniors’ retirement savings. If you’re unable to live the retirement lifestyle you had planned, turning to your life insurance policy might help enhance your retirement.
Your term policy is nearing its expiration date
5. Your term policy is nearing its expiration date
If your term policy is nearing its expiry date, a life settlement can be a great way to recover some of your premium payments and may even allow you to maintain coverage without future premiums.
Risks of Life Settlements and How to Safeguard Yourself
1. Privacy
Life settlement providers need to access the insured’s medical records and policy specifics to make a purchasing decision. To reduce the risk of misuse of your private information, always ensure you are working with a reputable and licensed provider.
2. Fees and Commission
Fees and commissions can significantly impact the final payout of a life settlement. If you pursue a life settlement with a broker, you could owe a substantial portion of your settlement to them. Since Canadian Life Settlements is a direct buyer, there are no fees or commissions.
3. Taxes
Policy owners should always consult a professional tax adviser about their potential tax liability.
4. Leaving Beneficiaries with Less
A life settlement can provide a timely cash boost. However, it also introduces the risk of leaving less for your loved ones after your passing.
5. No Coverage
Unless you have another policy or choose to receive a Retained Death Benefit, you’ll lack any coverage. While this may not be a concern for you, it’s an aspect worth considering.
Takeaway
Life settlements offer a valuable solution for policyholders who find their life insurance policies no longer meet their changing financial needs. They provide an opportunity to convert a policy into immediate cash, potentially more than the cash surrender value. However, as with any financial decision, it’s essential to fully understand the process, benefits, and potential risks. Always consult with a financial advisor to ensure a life settlement is the right choice for your individual circumstances.
Are you considering a life settlement for your life insurance policy? Wondering if you’re eligible to sell your life insurance policy? Learn more about selling your policy and find out if you qualify for a life settlement by contacting the experts at Canadian Life Settlements today.
