Planning your Life Settlement

If you hold a life insurance policy, planning a life settlement is one of the inevitable matters that come up in planning personal finances during the senior years. In this article, we’ll tackle some of the basic need-to-knows in planning a life settlement.  

A life settlement is simply a sale of an existing life insurance policy held by an individual. Since an insurance policy can’t be sold back to the company that “manufactured” it, they are sold to a third-party company, often called a life settlement provider, for a cash lump sum payment. The original policy older ceases to be responsible for the remaining premium payments, meaning that the buyer assumes payment and also becomes the beneficiary of the policy upon its maturation. 

What is a life settlement?

A life settlement is simply a sale of an existing life insurance policy held by an individual. Since an insurance policy can’t be sold back to the company that “manufactured” it, they are sold to a third-party company, often called a life settlement provider, for a cash lump sum payment. The original policy older ceases to be responsible for the remaining premium payments, meaning that the buyer assumes payment and also becomes the beneficiary of the policy upon its maturation.

Since a life settlement is often entered into by senior citizens (age 65 and above), it is also popularly known as a senior settlement or a senior life settlement.

The lump sum payment in a life settlement will typically be a lower amount than the death benefit, but more than the policy’s cash surrender value. A number of factors are used to determine the amount of your cash payment. These include the age and health of the policy holder, the annual cost of maintaining premium payments, and a discount rate.

Why consider a life settlement?

 A life settlement is a valuable and viable option for seniors in need of immediate financial assistance, i.e. a large amount of cash. It is also a good alternative option for seniors reevaluating their estate planning. Estate planning decisions may be reevaluated when changes in family circumstances, heirs’ projected income needs, and projected need for estate liquidity arise.

In addition to those reasons, a life settlement can be considered as a viable option when there is a sudden change in the health condition. Often, these changes pump up the price of the premiums, causing them to become to expensive to keep up. A life settlement should also be considered when seniors require long term care or immediate medical care. In this case, the policy holder may opt to sell his old life insurance policy and use the cash payout from a life settlement to by a new type of insurance coverage, such as long-term care coverage.
 
Business changes can also precipitate a life settlement, such as the retiring of a key man in a company or organizations.

Who qualifies for a life settlement?

Senior citizens over the age of 65 years, and who have a considerable history of health problems, are eligible to enter into a life settlement. Older seniors can also qualify, even if they have no serious problems in their medical history. The policy holder must also have a life insurance policy with a face value of at least $100,000. The policy must have been in-force for at least two years. Most types of individual life insurance coverage are eligible for life settlements, including universal, fixed term, whole life and survivorship policies.

How does the life settlement process work?

A buyer, or life settlement provider, will first examine the factors that will support its purchase of your life insurance policy. They also look into the life insurance company that issued the policy. They then make an offer to you (the policy holder or seller), providing you a closing package with the necessary papers. Upon your approval, they will then process the paperwork and deposit the funds into an escrow account held in your name. These funds will be released when ownership of your policy is transferred to them.
 
Be sure to have a financial advisor with you when dealing with any type of life settlement provider. Also shop around for the best offer; consider not just at one buyer but at least several. Although this may seem an unnecessary waste of time and money, they are vital in securing you the best value for your life insurance policy and to reduce financial risk.

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