Chapter 3: Life Settlement Eligibility
A life settlement can be a valuable financial option for a life insurance policy which may not be wanted or needed any longer. A cash settlement may be used, for example, to boost your retirement nest egg, fund a second life insurance policy or pay medical or ongoing care costs.
But not all insureds and not all policies qualify for a life settlement transaction. In this chapter, we will cover the basic requirements for life settlement eligibility.
Age: Generally, 70 years and older
The average age of an insured selling a life insurance policy is 78. An average, of course, suggests some are older and some younger. So, there is more to consider than simply birth dates.
Health and Underwriting
Just like your health was underwritten to issue your policy, your health will be underwritten for a life settlement. Typically three to five years medical records are reviewed by an actuary who will determine a life expectancy.
Life expectancy is a statistical calculation which takes into consideration the various health conditions of the individual being underwritten. This is standard in the life insurance industry, and similar methodologies were utilized when the policy was issued to set the policy rating and premium level. Importantly, no medical examinations are required for life settlement underwriting.
Your Life Insurance Policy
Life insurance is issued by many different carriers, each offering multiple types of insurance products. Your contract features will be evaluated as part of the underwriting process, but there are a few common elements to all policies that create an average policy profile.
Also known as the face value of the policy, $50,000 is generally the minimum size considered for a life settlements. However, there are exceptions, particularly for applicants with very serious health conditions.
Universal life, including guaranteed and survivorship universal life, is the most common life insurance product considered for a life settlement.
Term policies usually provide coverage for a set period of time, and often have options available to convert to permanent coverage. Term policies are typically converted to a permanent policy for a life settlement transaction, although in the case of an insured with serious health considerations, the policy may remain a term.
Whole life is difficult to transact because the product is designed to build cash high values, often resulting in the market value of policy equal to the cash value.
Naturally, lower premium levels are more favorable for the value of your policy in a life settlement transaction. Generally, an annual premium at a level of 5% of the face value or lower is preferred. However, more expensive policies can still find market value depending upon other variables considered.