What Is A Life Settlement?
This is a very simple transaction. An investor will purchase a life insurance policy. They will agree to make any future required premium payments too. In return, they will settle with the policy owner for a sum of cash. The amount of money is usually less than the actual death benefit of the policy, but probably far more than the surrender value if the owner just cashed the policy in the insurer. These are also known as viatical settlements or senior life settlements.
Are Life Settlements Legal?
Insurance is usually regulated at the state level, so you have to check with the rules where you live. But life insurance settlements, that comply with the rules, are legal and common.
What Life Insurance Policies Can Be Sold?
That does not mean that everybody can hope to sell any type of policy though. Investors look for certain requirements in order to make a deal.
Most investors want to purchase policies from senior citizens. It may seem sort of grim, but the fact is, they do not want to wait for 50 years to collect on their investment. That is why these transactions are called senior life settlements.
Investors want cash value policies like whole or universal life insurance. They do not want term policies that are likely to expire before they can collect the proceeds. Some term life policies are convertible to whole life, and these may also work.
How Much Money Can The Current Owner Hope To Get?
An investor will make an offer which is based upon many variables. Some variables will be the age and health of the insured person. Another factor will be the face value of the policy. Again, this does sound grim, but investors try to calculate how much they can profit off of the deal, and how quickly they can collect that profit. On the other hand, a policy owner could shop around for the best deal they can get.
Advantages Of Life Settlements
There are some very good reasons why a policy owner would want to sell their policy. Sometimes a company holds life insurance for an ex-employee who has retired or quit. This is a valuable asset, and they can sell it for a profit. Other times the insured person needs the money for their own use now. Selling the policy now will help out their family more than waiting for a future death benefit.
Disadvantages of Life Settlements
The biggest issue with selling the policy is that the beneficiaries will give up their rights to the proceeds from the policy after the insured person dies. It may seem like a bad deal to sell a million dollar policy for a few hundred thousand dollars. That is why it is a good practice to make sure that all parties are in agreement.
Since the investor will be likely to offer some percentage of the face value, they are accepting less money now. If a senior just wants to sell their policy because they cannot afford the premiums, they may find some better options. Some companies are willing to loan money to pay premiums in return for a percentage of the face value. That way the beneficiaries will still inherit some of the money.
Do Life Insurance Companies Like Life Settlements?
In general, insurers are not big fans of these arrangements. They would rather cash the policy in for a lower surrender value than pay out the larger death benefit. Of course, they would also rather that the owner just let the policy lapse so they will not be liable for a death benefit.
There is also the big problem with a concept called insurable interest. When an agent records the beneficiaries of a new policy, they must document the relationship of the beneficiaries. In other words, there must be a reason that the beneficiaries would be harmed by the death and have a right to collect the proceeds. So close relatives, domestic partners, or business associates are common beneficiaries of death benefits.
The other thing insurers consider is the wealth, or income potential, of the person being insured. It might be valid for a senior citizen, with a small income of social security payments, to purchase a small face value burial policy, but it would not be valid for them to purchase a new million dollar policy.
What Is A Life Settlement?
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