Life Settlement(s)

A life settlement is the legal sale of an existing life insurance policy (typically of seniors) for more than its cash surrender value, but less than its net death benefit, to a third party investor.[1] The investor assumes the financial responsibility for ongoing premiums and receives the death benefit when the insured dies. The primary reason the policyowner sells is because they can no longer afford the ongoing premiums, they no longer need or want the policy, to fund long-term care, increased medical costs, or they need money for other expenses.[2][3] On average, the policyowner receives three to five times more than the surrender value for the policy.[4][5]

In a retained death benefit transaction, policyowners receive cash payments and their beneficiaries also receive a payment after the insured dies. After the transaction has closed, there are no future premium obligations[6][7]

Term, permanent, or whole life insurance policies qualify for life settlement. Most commonly, universal life insurance policies are sold.[8][9][10] Policyowners are generally 65 or older and own a life insurance policy worth $100,000 or more.

How to do a life settlement?

The life settlement process starts with a policyholder presenting their policy to a provider, broker, or life settlement company to determine their eligibility. During this time, the third party will review medical records and policy information to see if the person qualifies for a life settlement.

Six(6) Life Insurance Settlement Options You Should Know

Life insurance serves many purposes, from income replacement to financial security in retirement. But estate planning — specifically, the creation of a tax-free inheritance for loved ones — is life insurance’s most recognized and popular feature. The policy’s death benefit, paid out to your named beneficiary after you pass, makes that possible.

That payout is called the “settlement” of your policy, and it can take different forms. Your beneficiary might receive the death benefit in a single lump-sum, for example, or as a lifetime stream of payments. Normally, you as the policyholder would choose the structure of the life insurance settlement, but your policy may allow your beneficiary to change it later.

Life insurance settlement options are notoriously confusing, particularly when you try to compare them. Evaluating a lump-sum payment relative to an annuity, for example, can feel like an “apples-to-oranges” comparison unless you are a trained statistician. Thankfully, you don’t need a knack for number-crunching to identify which settlement option best suits your situation. All you have to do is review this in-depth guide we created to help folks like you make an informed choice about life insurance settlement.

Read on for an overview of the six most common life insurance payout options. By the end, you’ll have working knowledge of lump-sum payments, interest income payments, interest accumulation, fixed period and fixed amount payout, and the life-only settlement, also known as the life annuity.