The life settlement market is gaining new popularity as aging populations realize there’s a little more life at the end of their retirement funds than they anticipated. The life settlement occurs when people who have whole life policies sells the existing policy to a broker or other third party for a value that’s higher than the surrender value of the policy but less than the policy’s death benefit.
There are many reasons people make the decision for a life settlement including any of the following:
1.) Prohibitive costs of maintaining life insurance payments.
2.) Financial hardships that force liquidation of assets.
3.) Interest in purchasing a different type of insurance policy.
4.) Policyholder feels that life insurance is no longer a necessary investment.
Whole life insurance often has a cash surrender value worth a portion of the death benefit the policy pays out. This value is typically much lower, but can provide a nice cash cushion for people who are interested in “cashing out” of their policies prior to their death. The amount of money available for policyholders to “cash out” is called the “surrender value.”
How Common is the Life Settlement Option?
While it’s not the most commonly understood option available to people who have life insurance, it is gaining traction and recognition among cash-strapped people looking for more palatable financial options than surrendering their policies or paying substantially higher premiums.
One California couple who were unaware of the life settlement option recently successfully sued their insurance providers for failing to disclose a life settlement as an option and they were forced to reduce the size of their life insurance policy twice from the starting point of $7.2 million to $2 million because they could no longer afford the higher premiums on their original policy.
Throughout the proceedings the couple claimed that their insurance provider (Lincoln National Insurance Company) offered only two options to them. They could chose to surrender their policy for its cash value or they could pay higher premiums for the policy. No mention was ever made of the existence of or their ability to consider a life settlement instead.
The judge in this matter agreed that the plaintiffs that the insurance provider had a duty to disclose this option to the policyholder in a decision that may have far reaching impacts on the insurance industry as a whole.
The more you know about your options when it comes to insurance policies and a life settlement, the better prepared you will be to make an informed decision about your life insurance choices.