A life settlement occurs when a policy owner sells their life insurance policy to a third party for an amount less than the death benefit of the policy, but more than the surrender value.. The result is that you are able to cash out immediately, and for an amount higher than you would have received by simply surrendering or lapsing. It’s a win-win for everyone involved. However, there are various forms of life settlements, each with their own criteria to determine who is eligible.
In this article, we’ll go over:
- How life settlement really works
- The most common forms of life settlement
- Eligibility criteria for the different types of settlements
- How to determine if life settlement is right for you
How Life Settlement Works
When you sell your policy to a third-party who takes over as the new owner and beneficiary and in exchange pays you a cash settlement, this is known as a life settlement. The amount of your settlement is based on a few factors, with important ones being:
- Your age
- Your health
- Your premium
- The type of insurance
- Your policy value, or death benefit
The good thing about a life settlement is that it is always going to be larger than the surrender value – that is, if you were to take the cash surrender option directly from your company and forgo the death benefit.
The amount of the payout depends on the type of policy and the health of the policyholder; for example, viatical settlements tend to pay a larger percentage of your policy compared to traditional life settlements. We’ll go over the type of each life settlement below.
The Most Common Forms of Life Settlement
Did you know? Not all life settlements are made equal. The different types have varying eligibility criteria, which we’ll go over below in the next section. Here’s a brief overview of the three most common that apply to most situations.
Traditional Life Settlement
With a traditional life settlement, the person is usually at least 65 years old, has a policy with a death benefit of at least $100,000, and has seen a change in their health status. The major factor out of these is usually the change in health status – a policy owner who was underwritten preferred when the policy was issued may be considered uninsurable now for health reasons.
Those older than 75 are more likely to qualify, though those under 65 can qualify as well if they have a severe health condition.
You can qualify for a traditional life settlement with different types of existing policies, including:
- Universal life
- Whole life
- Convertible term life
Viatical Life Settlement
A viatical settlement is the option of choice when the insured is terminally ill or has
a serious life-limiting medical condition. Whereas traditional life settlements will have the insured see a marked decline in health, viatical life settlements are more common when the insured has very significant changes in health.
Given these circumstances, viatical life settlements have higher valuation levels in the market. However, eligibility is more specific than other forms of life settlements.
Healthy Life Settlement
As life settlements have become more popular in recent years, options have opened up for those who still maintain good health. However, good health usually comes with stricter criteria on other factors, such as:
- Being at least 75 years old
- Having a universal life (UL) policy
- Having a higher death benefit, usually at least $250,000
Retained Death Benefit
The last of the most common life settlement options is one that allows you to have more flexibility. With a retained death benefit, you keep a portion of the death benefit instead of receiving a lump sum of cash. It allows you to eliminate premiums while still providing some level of benefit for your family.
The retained death benefit is the ideal option for those that need relief from premiums now but still wish to retain some level of benefit. Whereas other forms of life settlements may be great if you find the original benefit need has changed, for example when children have grown are no longer financially dependent or when a spouse has passed, and a cash payment today is most useful, the retained death benefit option is great to address the need for continued insurance protection.
Now that you have an understanding of each of the common types of life settlements, we’ll look who is eligible for a life settlement.
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Are you 65 or older?
If so, you meet one of the most important factors to determine if you may be eligible. If you’re 75 or older, the odds increase even more.
Are you in Good Health?
While life settlements have become increasingly more available to all people, they are still most common, and with higher payouts, for those that are at higher risk or in poor health.
If your life expectancy is likely less than 15 years, consider looking into a traditional life settlement option; whereas those that have much shorter life expectancies, such as due to terminal illness, may be eligible for a viatical life settlement which will pay much more.
Whether you’re short on cash, deem that your insurance policy is no longer serving its original purpose, or simply want money now, a life settlement is a great way to get your money in your hands now.
What type of Policy?
The most common policy type for a life settlement is a universal life policy. These are lifetime policies and most suitable for a life settlement.
Whole life policies are eligible, but since many whole life policies have large cash values, oftentimes it can be more advantageous for the policy owner to accept surrender value. Term policies offer temporary coverage, but can be sold, too. It is most advantageous if the policy can be converted to permanent coverage, such as a universal life.
However, a non-convertible policy can also be sold, particularly if the insured is in poor health or eligible for a viatical settlement.
Is a Life Settlement the Right Option?
There are some guidelines you can follow to help you decide if a life settlement is right for you. First, try to go back and think about the original reason you took out your life insurance policy…
- Was it to protect your children who may have been financially dependent on you?
- Is the key beneficiary, such as a spouse or sibling, still alive?
If there isn’t really a key beneficiary, or those that may have needed the death benefit are now independent and thriving on their own, it starts to make sense to look at if a life settlement is the right choice for you. Doing so can put much needed cash back in your pocket.
Second, are there more pressing financial needs than continuing life insurance coverage? At times, a cash benefit today and the discontinuation of ongoing premium payments provides a financial cushion or in some cases funds to pay for immediate expense needs.
Remember, though, even though not everyone is eligible and it is important to understand your options.
See if your circumstance check-off some of the boxes discussed here, and talk to a life settlement professional to help determine if a life settlement or viatical settlement is something you can consider.