If you have a life insurance policy you no longer need, you may have heard that you can sell it in exchange for a cash payment. Selling a life insurance policy for cash is called a life settlement.
In a life settlement transaction, you (the policy owner) receive a lump sum payment, which is less than the death benefit (also referred to as the face value of policy), but more than the policy’s cash surrender value. In exchange, a third party investor assumes your premium payments in exchange for receiving your death benefit.
How much you receive in your life settlement depends on a few things. The two most important factors are the size of your premium payments and your life expectancy.
The morbid truth is that the life settlement industry can only exist if life insurance policies are profitable. That’s why third-party institutional investors place a premium on policies for which the insured has a higher risk of passing away.
Most Common Life Settlement Options
A senior life settlement is a life settlement where the insured individual meets a minimum age requirement, typically over 65, and has a life expectancy of fewer than 15 years.
While criteria differ, life settlement brokers and providers typically look for those who’ve declined in health since purchasing their policy from the original insurance company. Senior life settlements are typically referred to simply as life settlements.
A viatical settlement is a life settlement where the policy owner has a terminal illness and has a high likelihood of passing away in the near future.
Viatical settlements are considered the most valuable on the secondary market, and their cash value can be worth anywhere from 50 to 80 percent of a policy’s death benefit.
Senior life settlements and viatical settlements are growing in popularity as the general public becomes more aware of their option to capitalize on their life insurance policy as a financial asset.
Within the life settlement industry, senior life settlements present the largest portion by volume.
Who Are Senior Life Settlements Good For?
While there are a number of reasons to get a life insurance settlement, there are also reasons to keep your existing life insurance policy. It is important to understand the pros and cons so that you can make an informed choice.
While we always recommend consulting with your financial advisor before making any large decisions, we’ve outlined some preliminary guidelines to determine if a life settlement is right for you.
The first question you want to ask yourself is:
“Do I still need this policy for its original intended purpose?”
Life insurance is often purchased when individuals have young children or spouses who are financially dependent on them. As policyholders reach their golden years, their children often become financially independent with children of their own. In some cases, the policyholder’s key beneficiary, the spouse, passes away.
In both of these scenarios, the advantages of a life settlement may start to outgrow the advantages of a death benefit. If you no longer need your insurance policy and prefer a cash payment now, then you may want to explore a life insurance settlement.
Another question to consider is:
“What are my current needs?”
Many elderly individuals are underprepared for retirement, have expensive long-term care needs, or are simply worried about the expense of future premiums.
If you find the death benefit of your life insurance policy is less valuable to you than an immediate lump sum payment, you may want to consider getting a settlement. In these cases, it’s also worth getting an estimate as to what your life policy is worth and evaluating that against the death benefit.
The final reason to get a life settlement is if your policy is about to lapse. Meaning it will no longer be active due to failure to make premium payments. In this case, it almost always makes sense to get a life settlement, as once your life policy lapses, you receive no value for it.
Whatever your reasons are for wanting to sell your life insurance, it’s important to note that a life settlement will almost always be higher than the cash surrender value offered by the life insurance company. Therefore, if you’ve determined you no longer need your policy, it’s always better to take a life settlement over simply discontinuing premiums or surrendering your policy.
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Should I Get A Senior Life Settlement or Viatical Settlement?
As we mentioned earlier, the life settlement industry is primarily broken up into two subsets: senior life settlements and viatical settlements. You cannot sell your policy twice, so you should understand which is right for you.
Again, viatical settlements are life settlements for individuals who have a terminal illness. Terminal illnesses are typically designated as those in which the insured has a life expectancy of 24 months or less. Common terminal illnesses include cancer or some form of heart disease.
Generally, viatical settlements almost always have a higher cash value than a simple life settlement.
The reason for this is the inverse relationship between life expectancy and the value of your insurance policy on the life settlement market. In blunt simplicity, the sooner you are expected to pass away, the more cash you’ll likely make in a life settlement transaction. Therefore the logic dictates: if you have a terminal or serious illness, a viatical settlement is probably your best option.
If you don’t have a terminal illness, but meet the age and policy size requirements for a life settlement, then you’ll get a standard senior life settlement.
If you are in good health, under age 60, or have a policy face value of less than $100k, it’s possible life settlement companies may not consider your application at all.
How Do I Make Sure I’m Getting The Best Deal On My Senior Life Settlement?
Good question. It’s essential to evaluate who you’re selling your life insurance to and for how much, in order to maximize your life settlement.
The first question to ask is whether you are selling through an insurance broker or directly to a life settlement provider.
In the case of a life insurance broker, you will receive help with the paperwork and “shopping” around your policy for a bid, in exchange for transaction costs and fees, roughly 10-25% of the settlement.
When selling directly to a life settlement provider, you get to keep more of the cash payment for yourself but are involved in doing more of the paperwork on your own.
Whichever process you decide is best for you, our guide to life settlement companies and brokers breaks down our top rated in the industry, as well as further detail on the process.
The next step is to make sure you shop around your policy for the best estimate.
The life settlement industry is bid-based, and the more eyes you get on your policy, the higher chance you have of getting a high bid. Make sure to ask your life settlement broker for a list of providers they’ve submitted applications to. Or, if you’re reaching out to providers directly, get at least five bids.
Know that you have resources available to protect your interests when selling your life insurance policy. There are a number of established resources designed to protect you, including unbiased organizations like the National Association of Insurance Commissioners (NAIC) and the Life Insurance Settlement Association (LISA).
Making the Right Decision
- First, determine if a life settlement is right for you.
- Then assess if you qualify for a viatical settlement or senior life settlement.
- Lastly, decide if you want to proceed with a broker or directly with a life settlement provider.