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Life Settlement

Life Insurance Options



A New Look at Your Old Life Insurance Policy - If you or a family member has a life insurance policy that is no longer affordable, you have options. When you stop paying premiums and let your policy lapse, you likely are missing out on other potential benefits. Consumers might not know they have better options, including: cashing the policy in for its surrender value; seeking an accelerated death benefit; exchanging the policy; taking a loan out against the policy; or seeking a life settlement.

Purpose

To get money from an unwanted or uneeded life insurance policy instead of allowing it to lapse or surrendering it for cash value. A life settlement is not an insurance product.

How it works

A third party buys a policy from an owner through a broker. The third party keeps the policy in force by paying the premiums until the insured's death, at which time the new owner collects the death benefit. The purchase price can be negotiated between the buyer and seller, but will always be larger than the cash surrender value and less than the death benefit. The price is based on the age and health of the insured, the size of the death benefit and the premiums, and the quality and size of the insurer. Some buyers, particularly institutional buyers, use sophisticated tools to determine the purchase price. Reputable buyers include accredited investors and qualified institutional buyers.

Who needs it

A policyowner who is no longer willing or able to pay premiums to keep the policy in force. Even policies with no cash value may qualify for a settlement. A reduction or elimination of the estate tax may also cause some people to consider selling their life policies.

Who may not need it

An owner whose beneficiary needs the death benefit.

When to sell it

Buyers purchase policies covering insureds who are still healthy and have life expectancies of five, 10 or even 15 years. Some buyers require insureds to be at least 65 years old.

How you get paid

In recent years, companies have sprung up for the purpose of brokering the purchase of policies, and some have been formed to buy policies. The latter pool money from many investors and have elevated the business to an institutional level so that sellers may feel confident they will not become targets of foul play. Given the potential for fraud in a life settlement, buyers and sellers need to perform due diligence.


Terms to Know

  • Insurable Interest  (View Definition )
  • Secondary Market  (View Definition )