Life Settlements: A Life Insurance Policy Is A Valuable Asset
Considering a Life Settlement? Here’s What You Need To Know
What Are Life Settlements?
The term “life settlements” refers to the selling of a life insurance policy to a person or company for a single cash payment. The purchasing party assumes responsibility for the policy’s monthly premiums and also becomes the policy’s new beneficiary.
Life insurance policies help beneficiaries after the policyholder passes away. That much you know. Surprisingly, many people don’t know they can be sold as an asset. This way the policyholder benefits from the policy in their lifetime.
Why would someone sell their life insurance policy? People pay the premiums on their life insurance policy for decades. Their life situation changes significantly in that time. Consequently, they may not be able to afford the premiums anymore. Additionally, the dependents they used to have may now be financially independent.
Life is unpredictable. For example, a sudden medical expense or change to your retirement options may require a new financial plan. Now you’re looking at life settlements as a financial solution.
Who Qualifies For Life Settlements?
Life settlements are not only for people who are terminally ill. For instance, if you have these three factors then your policy will likely qualify:
- You must be at least 70 years old or have significant health impairments.
- The face amount of your policy should be over $100K.
- The policy needs to be in force for at least 2 years, a few states require 5 years.
Windsor can potentially convert your term policy into a permanent product.
How Much Can You Get From A Life Settlement?
Insurance companies give you the option to surrender your policy for cash. However, the amount they are willing to give you is not nearly as much as you can receive from life settlements. A life settlement is usually 2-4 times as much as you would receive compared to surrendering your policy.
Still, policy holders allow 88% of all universal life insurance policies to lapse or surrender. That is, without payment of a death benefit. This is what insurance companies hope for. In particular, it’s how they make their money.
There are a lot of factors that determine how much a life insurance policy is worth. You can get an idea of whether your policy qualifies for a life settlement with our life settlement calculator. To be sure you’ll need to talk to a life settlement representative to get the most accurate quote.
What Does The Life Settlement Process Look Like?
Using a broker will secure you a higher payout for your policy. While this may be true the process with a life settlement broker will take longer than if you use a direct buyer. This is due to brokers spending time taking bids for your policy on the market. The competition among buyers on the market is what pushes the policy to sell for more.
Brokers get paid with a portion of the life settlement payout. However, they put thousands of dollars of their own money into preparing your policy. For example, they gather medical records and paperwork before the bidding process. This makes them financially invested in securing you the highest bid.
The process with a broker takes about 30-90 days. Here is more information on what to expect with a life settlement broker.
Do People Pay Taxes on Life Settlements?
You do pay taxes on the proceeds from life settlements. However, the amount of money you lose to taxes is much less than it used to be. In some cases, viatical settlements may not be taxed.
Check out this taxation guide for more information on life settlement taxes. By all means, we aren’t tax experts but we can help clarify the details around life settlement taxation. For your specific policy and situation, talk to a tax professional. Every policy is different, and therefore will be taxed differently.
Have Life Insurance Settlements Always Been Legal?
Life insurance settlements have been around for over 100 years. The industry dates back to a Supreme Court case in the early 1900s. “Grigsby v. Russell” and others confirm that a life insurance policy is an asset, just like a house or car. Basically, you as the policy owner have a right to sell that asset at any time.
This particular case is a landmark U.S. Supreme Court case because it validated the marketplace.
Increased Transparency of The Market
As mentioned, life insurance companies want policies to lapse. They don’t want you to sell your policy to a third party. Doing so keeps them responsible for paying the death benefit. For this reason, life insurance companies haven’t always been transparent with policyholders. In particular about all the options available for their policy.
Policyholders sued Lincoln National Life Insurance for “shock lapses” and lack of disclosure. Shock lapses refer to Lincoln National increasing their customer’s premiums for the same level of coverage. This inevitably caused a large number of policyholders to suddenly cancel or lapse their policies at once.
Just a little push in that direction and the insurance company got exactly what they wanted. They didn’t disclose the financial option of life settlements to the policyholders. Besides, it’s easy to let the policy go when you don’t realize how much money you can get from it.
Since these complaints, some states have started implementing disclosure requirements. Thus making it mandatory for insurance companies to provide all available options to policy owners. In particular policyholders considering lapsing a policy.
Terms to know
Beneficiary
The recipient of the life insurance policy’s death benefit upon the insured’s death.
Death Benefit
The money the beneficiaries receive upon the insured’s death.
Face Value
The stated value of the life insurance policy as well as another term for the death benefit.
Premiums
This is the heading
The payment a policyholder makes to their insurance company in exchange for coverage.
Lapsed Policy
A policy that hasn’t had its premiums paid for some time. To be sure this happens after the company sends notices to the policyholder. As a result of a lapsed policy, the death benefit isn’t paid.
Viatical Settlement
A financial option available to policyholders with a chronic or terminal illness. They no longer want their policy. As a result, they sell their life insurance policy for a cash amount that is less than the face value.
Cash Surrender Value
The amount of money an insurance company will pay. That is if a policyholder voluntarily cancels (or surrenders) the policy before a death benefit is paid.
Term Life Insurance
A temporary life insurance policy that gives coverage for a predetermined amount of time. Additionally, the premiums may increase over time or stay consistent.
Whole Life Insurance
A permanent life insurance policy with a savings component that accumulates cash value. Significantly, premiums for whole life insurance policies are guaranteed to stay the same.
Universal Life Insurance
An insurance policy that’s similar to a whole life insurance policy. But the premiums are not fixed and will increase over time.
Life Settlements With Windsor
At Windsor, we typically complete the life settlement process in 60-90 days, although very simple cases can be expedited. We’re happy to work with you on your liquidation goals. We’ll give you honest, clear responses so that you can manage your timeline. As well as plan for your immediate future.
Our goal is to get you the maximum value for your life insurance policy. Sometimes the best option is not a life settlement. For example, many clients have riders in their policy like an “Accelerated Death Benefit” that can be a better option. Our knowledge of the market and our relationships with investment groups make for a quick and thorough evaluation of your policy.
Transparency is important in all financial matters. Brokers will keep you up-to-date on all the details of the sale and transfer of your policy. You can also rest assured that we will follow industry best practices. Thus keeping your private financial and medical information secure.
About The Author
Windsor Life Settlements
If you're over age 75 or living with a terminal illness, don't allow your policy to lapse or settle for low offers from insurance companies. Consider receiving multiple offers from the Windsor Marketplace. Get a new quote today!
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