What Are Life Settlements? How Are They Regulated?

What Are Life Settlements? How Are They Regulated?

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Life settlements are an option for life insurance policyholders as an alternative to lapsing or surrendering their policy. A life settlement is when the policyholder sells their life insurance to a third party in exchange for a cash payment today.  For those unfamiliar with the practice, it can lead to the question of why would someone want to sell their life insurance policy?

It happens for a number of reasons. Some of the most common ones include:

  • They no longer need the coverage the policy provides
  • The premium is too much to maintain; can’t keep up with payments
  • Money is needed for other priorities, such as  long-term care or other expenses
  • You may need to dispose of assets to qualify for Medicaid

Viatical settlements are similar life settlements, but are reserved for insureds who have terminal or chronic illnesses. For this reason, payouts tend to be higher.  We’ll cover more in-depth about what each of these are and how people qualify for them, as well as answering the following questions:

  • How are they regulated?
  • Are life settlements safe?

Don’t lose your lifelong investment. Discover your policy’s value today.

What is a Life Settlement?

A life settlement occurs when a life insurance policyholder sells their policy to a third party for a lump sum of cash.   In exchange for the sale proceeds, the seller will no longer own the policy, will not be responsible for further premium payments nor will they receive any death benefits. 

Policyholders pursue life settlements because they often offer the greatest amount of cash when discontinuing coverage.  Oftentimes, policyholders consider selling for one of two reasons: the policy is no longer serving its original purpose or there have been changes in financial priorities.  For example, a policy might no longer serve its original purpose if the beneficiaries have become financially independent.  Common life changes that can impact the need for cash now include retirement and increasing medical expenses.

Not everyone is eligible for a life settlement. They are typically reserved for the following: 

  • Those that are at least 65 years or older;
  • And have a death benefit of at least $100,000

A similar transaction is a  viatical settlement, in which the insured has serious or life limiting  health conditions, such as  a terminal or chronic illness. 

Because of the circumstance, the payout for a viatical settlement is usually greater.

Whether you’re wondering if a life or viatical settlement is right for you, a few questions may come to mind such as whether or not they are a safe option to take, if there are regulations, and what the process looks like.

Are Life Settlements Safe? Legal?

Life settlements have over a 100-year history of precedence. It all started in 1911, when the U.S. Supreme Court case of Grigsby v. Russell, 222 U.S. 149 (1911), found that life insurance was indeed private property – having all of the regular characteristics of property – and could be transferred or sold at the owner’s possession.

Transactions became further refined during the AIDS epidemic of the 1980s, where many victims were in need of resources to pay for  treatment and expensive medications. The sale of a life insurance policy served this purpose for many.

In 2001, the National Association of Insurance Commissioners created transaction guidelines to promote standards of conduct and consumer protections.  By  2009, the United States Special Committee on Aging found that life settlements yielded about 8x more value than the cash surrender counterpart offered by insurance companies.

Today, life settlements are part of an established industry which helps people leverage their life insurance policies for cash now.

What is a Life Settlement?

Don’t lose your lifelong investment. Discover your policy’s value today.

How Are They Regulated?

Most states regulate the process of selling a life insurance policy, with regulation covering approximately 90% of the US population. Regulations focus on licensure, transaction practices and disclosures.  Most states require that a  life insurance policy is in-force for at least two years before it can be eligible for a life settlement, with a handful of states requiring at least five years subject to some exceptions. 

The Life Insurance Settlement Association, LISA, is the nation’s oldest and largest association representing life settlement participants, and has a mission to both advance the highest professional standards in the transaction and educate consumers and advisors to this valuable alternative to lapsing or surrendering an life insurance policy. 

Creating the Best Outcome

In order for all parties to find the best outcome, it’s important to do your research and understand all available options.  To assess if selling your life insurance policy is the right option for you, ask yourself the following two questions:

Is the policy still serving a useful purpose?

In many instances, life insurance policies are taken out to protect the beneficiaries – such as spouses and children. When these beneficiaries are no longer financially dependent on you (such as children finding their way or the passing of a spouse), then a life insurance policy can be an extra, unnecessary expense that you may not need anymore.

Are financial priorities changing or is there a need for cash now?

In retirement, budget priorities can change over time and sometimes an unplanned expense can lead to reevaluating spending.  People are  living longer now than ever before, savings that were set aside may have to be stretched.  Selling your insurance policy to a third party can be one way reduce ongoing expenses and bolster retirement savings or pay for unplanned expense.  

Don’t lose your lifelong investment. Discover your policy’s value today.