Why Lifetime Settlements Offer a Way Out

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The time may come when owners of life insurance policies will want to get rid of their policies. Maybe they just don’t want to pay the premium anymore, or they find themselves in a situation where they need access to cash due to a large, and often unexpected, expense. Yet others simply don’t believe they need the protection offered by life insurance companies.

Key points to remember

  • The time may come when owners of life insurance policies will want to get rid of their policies.
  • A life settlement occurs when a life insurance policy is sold to an individual or entity (other than the original policy issuer) for an amount that exceeds the cash value of the policy but is less than the net death benefit.
  • Lifetime settlements are distinct from other disposition options in that the ownership of the policy is transferred to another person or entity.

Whatever the reason, policyholders should be aware of all of the options available to them when deciding to get rid of an unwanted policy. Historically, there have been six methods:

But recently, an additional option was introduced. This option is called life settlement.

Life Settlement Features

According to the Financial Industry Regulatory Authority, a life settlement occurs when a life insurance policy is sold to an individual or entity (other than the original policy issuer) for an amount that exceeds the cash value of the policy but is less than the net death benefit. . The seller usually receives the payment as a lump sum and is no longer responsible for the premium payments on the insurance policy. These are now the responsibility of the buyer.

Life insurance settlements are distinct from the above six disposition options in that the ownership of the policy is transferred to another person or entity. This concept may sound familiar as it relates to what the life insurance industry calls viatic settlements. Viatic settlements are exchanges that also involve the sale of a life insurance policy to a third party; however, they differ from life insurance regulations in that the insured has a terminal illness.

Lifetime Settlement Auctions

Most policy owners seek the help of a life settlement broker when trying to sell their policies. Life settlement brokers contact life settlement companies to let them know that a policy is available for purchase.

The broker then waits for the life settlement companies to bid on the policy (much like an auction). Upon receipt of all offers, the broker informs the policy owner which company has offered the most money for the policy. The policy owner usually sells their policy to the company that is willing to pay the most money.

Purchase of life insurance policies

You might be wondering why a business would want to buy someone else’s life insurance policy. The short answer is that when the policy is sold, the new owner becomes the beneficiary of the policy. If you agree to sell your life insurance policy to a life settlement company, for example, the company is effectively buying the right to receive the death benefit that the insurer will pay on your death. It can be a worthwhile investment for the company if it thinks the factors are favorable that it will collect.

Many policy owners who are considering selling their policies through life insurance settlement transactions are uncomfortable with the idea that a life insurance settlement company is essentially waiting for their death. The idea of ​​a business that counts weeks, months, or years to death is not very heartwarming. Some may even go so far as to think that a company will resort to nefarious means to access the death benefit as soon as possible. However, keep in mind that the goal of life settlement companies is to make money. Companies would eventually go out of business if they engaged in any type of criminal behavior to speed up the claims process.

In addition, some entities that buy life insurance contracts from others are not too concerned about the death of the insured. These entities buy life insurance policies so that they can be used as collateral to obtain financing from banks. Whether the insured dies in two years or in 20 years means little to the company; he just wants to own the policy so he can qualify for a loan today.

The bottom line

Life insurance settlements provide an additional option for life insurance policy owners who decide what to do with a policy they no longer want or need. From a monetary perspective, this alternative may be more attractive than the six traditional methods of winding up policies. This is reason enough for policyholders to discuss the idea with one of their trusted advisors (i.e. financial planner, accountant, broker, lawyer, etc.).

There will likely always be concerns that the companies that buy these policies could participate in criminal behavior. But with proper due diligence performed on the life settlement broker, the life settlement company and any other entity involved in the transaction, an individual should be able to allay these fears. Additionally, the fact that the industry is actively monitored by the New York attorney general (and arguably other attorneys general in other states) may allay the concerns of some.


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