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Life Settlement Key Terms
Understand the key aspects to Life Settlements
The amount of money that will be paid to the beneficiary (or beneficiaries) upon the death of the insured person.
The stated dollar value of the life insurance policy. This amount usually equals the policy’s death benefit
Cash Surrender Value
The amount paid by an insurance company to the policyowner if they voluntarily cancel or surrender their policy.
What Is a Life Settlement?
A Life Settlement is the sale of a life insurance policy in exchange for a lump sum cash payment.
In Life Settlements, the settlement amount will be more than the cash surrender value of the policy, but less than the death benefit.
In exchange for the lump sum payment, the seller will no longer be responsible for premiums or have rights to the death benefit . The buyer of the policy will assume all aspects of ownership, including future premium payments, as well as the death benefit .
Most people purchase a life insurance policy for financial protection. But when the need for protection has passed, or the policy premiums become an unwanted burden, a Life Settlement can be a great option.
Life settlements, a complete overview:
Read on for an in-depth look into how life settlements work, their regulations, history, and everything you need to know to make an informed decision.
When does a Life Settlement Make Sense?
Your life’s priorities are always changing. Perhaps your premiums have become unaffordable,
you no longer need the coverage, or you simply want the cash to fulfill a lifelong dream.
Premiums are unaffordable
How you live with your money is your decision, and insurance premiums may sometimes become an unnecessary burden. By selling your policy you not only get relief from ongoing payments, you also enjoy a lump sum payout today.
Enjoy more wealth in retirement
A comfortable, secure retirement relies on a financial cushion created by years of savings. Studies show, however, that many retirees face funding shortfalls¹. A life settlement can bolster your financial cushion to add comfort, security, and fun.
Life insurance no longer needed
The original purpose for your insurance coverage might no longer exist. Your children might have grown up. The mortgage might be paid off. Taxes might no longer worry you. Unneeded coverage can be sold, eliminating the expense.
Term policy is expiring soon
A term policy provides coverage for a certain time period, and then expires with no surrender value . However, you may be able to convert your policy to a permanent plan, such as a universal life policy, and sell the new plan for cash.
Pay for quality senior living
Senior living communities and in-home care are costly. A life settlement can provide you with the resources to help afford these services, so you can live your golden years on your own terms, near or with family.
Pay for better medical care
Medical expenses can add up quickly, and selling your policy can provide additional funding during a time of need, offering relief, alleviating financial burdens, and even making upgraded care possible.
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Common Types of Life Settlements
There are multiple options when it comes to Life Settlements. The most common types are traditional, viatical , and retained death benefit settlements. Here’s a closer look at each:
A traditional life settlement is the most common way to sell your life insurance policy. Insured individuals who are age 65 and older and hold a life insurance policy that is worth $100,000 or more may be eligible.
A viatical settlement is quite similar to a traditional life settlement, with the exception that it is designed specifically for individuals who are chronically or terminally ill. There is no minimum age requirement.
Retained Death Benefit
A retained death benefit helps you retain a portion of the death benefi t after the life settlement . The buyer will assume the payment of the premiums and will receive the remaining portion of the death benefit .
Life Settlement Options
- The primary advantage of a
life settlement is financial. By eliminating ongoing premium obligations and receiving a lump sum of cash , you find yourself with new money in your budget. Sellers have many uses for these funds, from payment of medical or care expenses to supplementing retirement income and travel.
- The disadvantage, of course, is that the benefit of the policy will be paid to the new owner, and not the seller’s beneficiary. In addition, the
cash payments are considered income, and therefore may have tax consequences and impact your eligibility for Medicaid.
- Other considerations include transaction costs or commissions, if you are working with a broker. Typically, a broker charges a commission as a percentage of the sale proceeds, and rates can vary. Know before you get into it.
- In general, your original decision to purchase life insurance was a financial one — to protect against a risk that could bring financial harm. Your decision to
sell a life insurance policy is often financial as well: funding your next chapter is more valuable than protection.
Life Settlement Eligibility Requirements
When it comes to selling your life insurance policy , multiple variables can affect your eligibility. The 3 most basic requirements are:
To be eligible for a
There are multiple types of policies in the market that can be eligible for a life settlement
The third major factor is how much the
Life Settlements Process
Apex is committed to simplify the complex process for you. Here are the steps of a life settlement process, so you know exactly what to expect when selling your policy. Keep in mind that although every process is different, a typical transaction can take 4 months to complete².
The life settlement process begins with collecting some basic information about the owner, the insured, and the policy. Apex offers a simple application that includes release forms so additional information can be requested for underwriting.
Detailed information is collected for underwriting of both the policy and the insured. For the policy, information will include the policy’s costs, features, and policy illustration. The releases will be used to gather the insured’s medical records for review.
Once the policy and insured records are collected, we have enough information to determine the value of your life insurance policy, and the amount of cash we can offer you to fund whatever you have planned next.
After completing the review, the provider extends an offer either directly to you or to your advisor. There is no obligation to proceed with a sale; it is 100% your choice whether to accept or decline the offer.
Once you accept the offer, the provider will prepare agreements (according to your state’s requirements). After contracting and diligence are complete, the request to change ownership + beneficiary will be sent to the carrier.
Once the change of ownership and beneficiary is verified, the settlement payment funds will be transferred to the policy seller through a single direct deposit or a check. At that point, you are free to enjoy the funds at your discretion!
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Life Settlement Taxes
The IRS provides guidance for the taxation of life settlement proceeds. When you sell a policy , the proceeds are considered to fall across the following three categories:
Proceeds up to the tax basis, which is the amount of premium paid-in over time, is tax-free.
Proceeds greater than the tax basis, and up to the amount of the cash surrender value, is taxed at the seller’s marginal tax rate.
Proceeds in excess of the cash surrender value are taxed as short-term (up to 24 months) or long-term (24 months and beyond) capital gains.
Other regulations on the life settlements industry
Consult with a tax professional for clarity on both the IRS guidance and how your state of residence would view life settlement proceeds. Apex Settlement Group does not provide tax, legal, or accounting advice. This information is not intended to provide or to be relied on for tax, legal, or accounting advice. Consult your personal tax, legal, and accounting advisors before getting into any transaction.
¹ Baby Boomers have an average of $152,000 saved for retirement, according to the 19th Annual Retirement Survey of Workers conducted by the TransAmerica Center for Retirement Studies. This is not nearly enough to last through retirement. Based on information from the Bureau of Labor Statistics, adults between ages 65 and 74 spend, on average, $48,885 a year. Source: Investopedia
² Source: LISA Website
Apex consists of an expert family of Life Insurance Policy Guides who offer insightful education, continuous guidance, and direct access to life settlement capital markets. We promise you an informed, 1:1, hands-on experience that will leave you feeling in control and in the know.