A life insurance policy is a very personal piece of property for many people. It wasn’t purchased for the benefit of the insured but for the benefit of the beneficiary. At the time the policy was applied for, there was a potential financial need in someone’s life that needed to be met if the insured passed away. That’s why people pay life insurance premiums – to take care of their financial obligations to others.
However, sometimes needs and obligations change. The need for liquidity is reduced or eliminated because the mortgage has been paid off, the kids have graduated from college, or there is sufficient capital in a retirement account. Because of this, oftentimes life insurance policies have then served their purpose and are no longer needed to provide financial security for someone.
Unfortunately, many people simply stop paying on their life insurance policies and let them lapse without any value. The insurance company has collected premiums on that policy for years and will never have to pay a death benefit to a beneficiary. Some studies claim that as many as 80 percent of life insurance policies will lapse before a payout is due. This has proven to be very profitable for insurance companies.
Many people let their policies lapse, unaware that they had a better option available to them when they no longer wanted or were able to pay their premium. That option is called “The Life Settlement.”
What Are Life Settlements?
Simply put, a life settlement is a transaction in which the owner of a life insurance policy sells their policy to a third-party, usually an investor, for cash considerations. Selling a policy is a more financially rewarding alternative compared to letting the policy lapse or surrendering it back to the insurance company because the selling price of the policy is usually higher than the current cash value of the policy.
When a life settlement transaction is finalized, you receive the proceeds of the sale in cash, resulting in the transfer of ownership to the buyer. From that point forward, you will no longer be responsible for paying premiums. The new policyowner will control the disposition of the policy’s death benefit and they will eventually be the beneficiary of the policy upon your death.
You’re a candidate for a life settlement if you are at least age 70 (or have a terminal illness) and own a life insurance policy that’s valued at $100,000 or more. Some states also have minimum policy age requirements, meaning the number of years since you initiated the coverage.
The Value of Your Life Insurance Policy
Several factors affect the value of your life insurance policy, including:
- Your age
- Your gender
- Your health and life expectancy
- The policy type
- The policy size
- Your accumulated cash value
- The ongoing premium on the policy
Policy buyers prefer older policyholders, large policy face amounts, and cash value balances that are large enough to fund future premiums.
The estimated value of your policy will always be smaller than its face value or death benefit. The reason for this is that life settlement providers are buying your life insurance as an investment. It wouldn’t be a good investment if the purchase price today was the same as the future death benefit.
A life settlement will generate more cash than surrendering your life insurance policy. In some cases, life settlements have resulted in policyowners receiving more than 50% of the face amount of the policy. The reason for this is that investors are willing to pay more than the surrender value of your policy. Few policyowners would logically choose a life settlement if surrendering the policy to the insurance company was more lucrative.
Why Pursue a Life Settlement?
A logical question that many people ask is, “Why would I want to sell my life insurance policy?” The answer to that question is going to vary from individual to individual. Let’s look at some of the reasons people pursue life settlements.
- Increasing premiums: Life insurance premiums often increase when the need for the policy is not as great as when first purchased. When this happens after age 70, these high premiums become much less affordable for an individual that is living off retirement benefits and Social Security. A life settlement is a double-win: it provides extra cash to the seller while also eliminating an ongoing expense.
- Replaces lost income: After spending their life working, many seniors experience difficulty paying for their daily living expenses after retirement. A life settlement provides a way to replace lost income and pay unforeseen expenses.
- Improve retirement lifestyle: Retirees want to have ample income to enjoy life after working for decades. Travel, hobbies, gifting to charities, and time with family are all noble pursuits for seniors, but they must have the money to pay for these pursuits. A life settlement can help make retirement dreams become a reality.
- Term policy coverage is ending: Buying a term life policy is a great option for some younger people, but premiums can become unaffordable as years pass. It the policyowner lets the term policy lapse, they will receive no benefit from having paid years of premiums. Selling a term life insurance policy is able to be accomplished through a life settlement, providing the term policy is convertible to a universal or whole life policy before the policy is lapsed.
- Pay down debt: Seniors who still have debt from mortgages, credit cards or other outstanding loans often don’t want that debt being a financial burden during their retirement years, and they don’t want to pass a financial burden along to their heirs. With a life settlement, a life insurance policy the owner no longer needs can become funds to reduce or eliminate personal or business debt.
Don’t lose your lifelong investment. Discover your policy’s value today.
What are Viatical Settlements?
A viatical settlement occurs when someone is diagnosed as terminally ill or chronically ill, and sells their life insurance policy to someone else in order to receive money while they are still alive. A good example of this can be seen through the true story of John Burchard.
In the early 1900s, Burchard needed surgical treatment from Dr. A. H. Grigsby for a surgical procedure he wasn’t able to pay for. Mr. Burchard struck a deal with Dr. Grigsby, agreeing that Burchard would the doctor his life insurance policy for $100, with the understanding that Dr. Grigsby would assume the responsibility for paying the premiums and ultimately receive the death benefit upon Burchard’s passing.
It can be said that this was the first ever viatical settlement. When Mr. Burchard died, a legal battle ensued and his family contested the legality of the agreement. Ultimately, the U.S. Supreme Court ruled in 1911 that the agreement was both legal and binding.
This decision set the precedent for all future viatical settlements to be considered legal agreements. Life insurance is indeed private property and can be assigned at the discretion of the owner. Unfortunately, many people aren’t aware of this living benefit of life insurance and miss out on having funds available when they are in great need of them due to critical illness.
Viatical Settlements vs. Life Settlements
Many people have heard the terms viatical settlement and life settlement, and either think they’re the same thing or they don’t understand what either of them are. They are related to each other in some aspects but different in some very important ways.
Just like life settlements, viatical settlements are also benefits obtained from owning and selling a life insurance policy. With a life settlement, the policy owner can sell the policy to a third party when they are either healthy or ill, as opposed to having to be terminally or chronically ill with a viatical settlement. This is a very important differentiator between the two because of the financial implications involved.
With a life settlement agreement, the policyowner sells the policy to a third party and receives payment equal to a percentage of the face amount of the policy, that is the amount to be paid to a beneficiary when the insured passes away. The third party then continues to pay the premiums due until the insured dies. The new policyowner then receives the full death benefit payable.
Comparatively, people engage in a viatical settlement when they know their life is drawing to a close, or they need extensive medical care. The death benefit is no longer the primary benefit of their policy, it’s the cash they can get out of the policy while they’re alive which will benefit them.
Who Qualifies to Receive Viatical Settlement Benefits?
The standard definition of eligibility to receive a viatical settlement payment is someone who is either terminally ill, defined as having less than a two-year life expectancy, or someone who is chronically ill.
As can be expected, the onus of proof falls on the policy owner to prove that they have less than two years to live. This will require that evidence is submitted from a health care provider, such as an oncologist or cardiologist, that the insured is terminally ill and will not live for another two years.
A person qualifies as chronically ill if they aren’t able to perform two of the basic activities of daily living, such as eating, using the toilet, bathing, or dressing themselves. They would also qualify if they are severely chronically impaired, such as having Alzheimer’s Disease or dementia, or that they need supervision to prevent them from threats to their health and safety.
In either case, these are very dire and disheartening situations for the afflicted, but also for their families. In addition to all of the logistical challenges involved, such as where the ill individual is going to spend their final days and what final arrangements need to be made that haven’t been already, there is the financial impact to the whole family, which needs to be taken into consideration.
Questions and Answers
Who is going to purchase my life insurance policy?
Life settlement providers or viatical settlement providers typically purchase life insurance policies. They buy life insurance policies either as an individual investor or for clients that are institutional investors.
Who is going to sell my life insurance policy?
Life settlements solutions are offered by a life settlement brokerage that will sell your policy. They will sometimes utilize an auction system or work through a network of potential purchasers they’re familiar with.
Does a life settlement broker represent me or the buyer?
They represent you, the owner of the policy. Brokers have a responsibility to act in a policyowner’s best interests, meaning they must represent and market your policy with fairness and do their best to obtain the best price possible for your policy.
How long will the entire transaction take?
It can take as long as four months to be finalized. Medical records and documents pertaining to the policy must be gathered, life expectancy analyzed, the policy marketed, and bids received. The transaction is finalized when you settle on an offer.
What fees will I have to pay for a life settlement?
You won’t have upfront costs or fees with a life settlement. If a broker is involved in the transaction, that broker will earn a commission, which is deducted from the proceeds of the sale. Because they get you competitive bids, using the services of a broker can result in your receiving a larger payout, even after the broker has been paid their commission.
Will my privacy be protected?
Your privacy is protected throughout the entire process; no information that could identify you is ever shared without your consent. Your health records are shared only with an underwriter that is working on your transaction, but you will never have to be personally involved.
Can I use my life settlement money as I please?
Yes, there are no restriction on how you use the proceeds from the sale of your policy. Use them for medical expenses, charitable gifts, travel, or to purchase a home, car, or boat. Life settlement brokers can provide you with guidance on life settlements and viatical settlements and if they are appropriate for your situation. Settlement brokers often have a calculator on their website that can provide you with an estimate of the value of your policy to a potential purchaser.
Don’t lose your lifelong investment. Discover your policy’s value today.