What is a Senior Life Settlement?

Last updated on January 9, 2019 by Kamran Rosen in Life Settlements, Retirement Planning

Two seniors at a family gathering in a park.

If you’re an individual with a life insurance policy you no longer need, you may have heard of the option to sell it in exchange for a cash payment, in what’s known as a life settlement. In a life settlement transaction, you, the policy owner, will 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 cash surrender value of policy. 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, is dependent on a few things, the most important of which is the size of your premium payments, and your life expectancy. While it’s a morbid truth to face, the life settlement industry can only exist if life insurance policies are profitable, and as such, third party investors place a premium on policies for which the insured has a higher risk of passing away.

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Two Most Common Options

Due to this there are two main subsets of life settlements that are the most common: viatical settlements and senior 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. These 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.

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 less than 15 years. While criteria differ, life settlement brokers and providers are typically looking 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.

Senior life 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, and not sunk costs. Within the life settlement industry, senior life settlements present the largest portion by volume.

Who Are Senior Life Settlements Good For?

There are a number of reasons to get a life insurance settlement, and a number of reasons to keep your existing life insurance policy – and it’s important to understand what’s right for you. While we always recommending consulting 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?” Often life insurance is purchased when individuals have young children or spouses who are financially dependent on them. As policy owners reach seniority, their children often become financially independent, with children of their own, and their spouses may have passed away. If you feel you longer need your insurance policy, and prefer a cash payment now, then you may want to explore a life insurance settlement.

The other question is considering what your current needs are. Many elderly individuals have 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 also 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 again 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 evaluated you no longer need your policy, it’s always better to take a life settlement over simply discontinuing premiums or surrendering your policy.

Should I Get A Senior Life Settlement or Viatical Settlement?

As we mentioned earlier, the life settlement industry is primarily broken up into 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, which is typically designated as one where the insured has a life expectancy of 24 months or less. This is commonly cancer, or a form of heart disease.

Generally, viatical settlements will 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.

Two fisherman around a campfire.

How Do I Make Sure I’m Getting The Best Deal On My Senior Life Settlement?

Good question. It’s very important 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 or not you are selling through an insurance broker, or directly to a life insurance 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 for yourself. 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 5 bids.

It’s also important to know your resources when selling your life insurance policy. There are a number of established resources designed to protect you, including the National Association of Insurance Commissioners (NAIC) and the Life Insurance Settlement Association (LISA). These are unbiased organizations with resources designed to help you in most insurance or settlement needs.

Conclusion

So remember, first determine if a life settlement is right for you, then decide if you qualify for a viatical settlement or senior life settlement, and then decide if you want to proceed with a broker or directly with a life insurance provider. If you get confused along the way, check out our website for more resources, or contact us directly.

Kamran Rosen
Kamran Rosen
Kamran is a freelance personal finance writer and expert. He graduated with B.S. in economics from University of Vermont. He was previously a staff writer for both Nerd Wallet and The Hustle.

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