A Brief Introduction to Life Settlements

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Life settlement is a process of selling your life insurance policy to a third party for a price higher than its surrender value and lower than its face value. Here, the third-party buyer pays the original policyholder a single time payment and becomes the owner of the policy, which includes him, paying the remaining future premiums as well.

Today, life settlements have become very popular among people since it has given the insurers a chance to make cash out of a life insurance policy that they no longer need. On the other hand, the third-party buyers who buy life insurance see life settlements as an alternative investment that could yield them a huge sum of money when the insurer passes away.

While it’s true that there is an increase in the people opting for life settlements, the truth is, most of the insurance policyholders are still unaware of how the life settlements work. This is why most folks simply stop paying their premiums to allow the policy to lapse or surrender their policy for less value. You might be shocked to know that more than 80% of the total life insurance policies are either surrendered or lapsed every year in the US.

This makes life settlements a viable option for the people who no longer wish to continue paying premiums for their existing life insurance policy. It also allows them to get cash during a financial crunch. Life settlements typically provide the insurer more money than what they otherwise receive if they surrender their insurance policy.

And when the insurer passes away, the new beneficiary gets the total death benefit of the life insurance policy, which is considerably higher than what the beneficiary pays to the insurer. It is also known as life settlement investments since it acts as an investment for the buyer.

A brief history of life settlements

Life settlements have been around since the early 1900s, thanks to a Supreme Court case that is tracked to the 1900s. The case in question is by Grisby v. Russell, which included a ruling that said: “So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of a property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

In layman’s terms, this case has made it very clear that just like other properties, life insurance policy is also a property, which can be liquidated to obtain cash, if policyholder wishes.

Who is eligible for a life settlement?

Life settlements are a great financial tool the senior citizens. However, not everyone can opt for a life settlement; there are specific criteria that one must meet to qualify for a life settlement. For example, if an insurer has a life insurance policy valued more than $50,000 and has a life expectancy of fewer than 20 years, then it’s more likely that there will be buyers for the life insurance. Here are some of the requirements that are used to gauge eligibility for a life settlement:

  • You are eligible for a life settlement when your beneficiary passes away.
  • You have outlived the guaranteed number of insured years.
  • You no longer need insurance, since your children are settled and are doing well.
  • You had a divorce.
  • You need cash for medical emergencies.

Aforementioned are some of the scenarios where you can be eligible to opt for a life settlement. All these scenarios reflect a negative, financial dynamic or change, which lead the senior citizens to go for life settlements. However, life settlements are not the last resort, but rather, they are a solution.

How does the life settlement process work?

The life insurance policy owner can start the process of life settlement by arranging a sale of their policy through a life settlement broker or a life settlement service provider. These brokers and life settlement providers then will collect all your documents and will calculate the face value and the surrender value of the policy. Also, they will evaluate your medical reports to get an estimate about your life expectancy and the mortality risk.

Once done, these brokers and life settlement providers look out for buyers interested to invest in your life insurance policy. Then the providers pool the policies and transfer them to a financial institution to scrutinize the policies to confirm the life settlement. The brokers and the settlement providers then calculate a value for your life insurance that is lower than the face value but higher than the surrender value of your insurance. When both the buyer and the seller agree to the amount fixed, the life settlement process is completed.

Life settlements have innumerable benefits and they serve as a crucial asset that you can use when you need. Using this financial tool, you can exchange a policy for a cash settlement instead, obtaining the money you need for a variety of different life expenses.