When policyholders sell their life insurance policies to financial institutions for a lump sum cash payment, then the process is called Life Settlement. Post the purchase, companies that buy insurance policies are responsible for paying all its future premiums and are eligible to get the complete death benefit of the policy upon the death of the insured.
It’s crucial that policyholders understand the complete process of selling their insurance policies along with the benefits and risks associated with it. This article presents all such details that policyholders need to be aware of.
It all began in 1911 when Justice Oliver Wendell Holmes established an important decision in the case of Grigsby Vs. Russell. He established the life insurance policy as a saleable asset and gave several vital legal rights to the policy owner such as changing the beneficiary of the policy, selling the insurance policy to a third party in exchange for a cash payment, borrowing money from the policy, and using the policy as collateral against a loan.
In the 1980s, the life settlement market grew because of the HIV virus. Patients suffering from the terminal condition such as HIV no longer needed their life insurance policies and hence, sold them for an amount greater than their cash surrender value. Since then, the life settlement market has grown steadily into a billion dollar one.
It’s crucial that policyholders check if they are eligible for a life settlement. Some of the factors that need to be considered for eligibility are:
- Age and Health conditions- It’s commonly seen that people who suffer from terminal/chronic diseases or/and are older than 65 years choose to sell their life insurance policies.
- Policy Type- This defines the type of policy that the holder possesses such as Universal policy or Whole Term policy.
- Policy Size- The policy size is determined by its face value. A life insurance policy with a face value of $50,000 – $100,000 can be sold.
There are several alternatives that policy owners can consider when they need financial assistance such as-
- Here is the first tax-free option which policy owners can consider. They can consider borrowing money from the cash value of the life insurance policy. The elderly (Policy owners who are older than 65 years) often choose this option. In this option, the effect of the life insurance policy remains intact.
- Terminally ill patients can access the death benefit of their life insurance policy earlier than the specified date. This option results in the reduction of the total death benefit by the amount borrowed.
- Selling the life insurance policy to a third party or financial institution for a one-time cash settlement is a popular option for the past few decades.
- The fourth viable option which policyholders can consider is withdrawing funds from the death benefit of the insurance policy. The higher limit on the withdrawal amount usually depends on the type of the insurance policy purchased and the company which sold the life insurance policy.
Policy owners should go through these points and choose an option based on their requirements.
Life settlement has become a popular option because of the several advantages associated with it. Some of them are:
- Sometimes, changes in tax law or estate can lead to the lapse of insurance policies. Policy owners can sell their policies before they lapse which can, in turn, prevent financial loss.
- Life settlements are one of the best ways for policyholders to get rid of the burden of paying expensive life insurance policy premiums.
- High return- Typically, the return offered by life settlements is high which is usually in the range of 10% to 14%.
- The life settlement market is a promising one and is, therefore, attracting potential buyers and sellers.
- The extra cash obtained from selling their life insurance policies can be used by senior citizens to buy a retirement home, support the dependants with their financial needs and also use it cover expensive medical bills and surgeries.
- Policy owners can get instant access to a huge amount of money.
It’s important that the policy owners consult an experienced financial advisor to get all their doubts cleared regarding their eligibility, tax liability, risks, and other factors involved the process of a life settlement.
Policy owners also need to identify a list of potential companies that buy insurance policies and choose the best one from them. I hope that this article helps you to understand life settlements in a better way and make a wise decision. Thanks for reading!