A life settlement transaction provides a way for the owner of a life insurance policy to sell the policy to a third party for more than the present cash value. In the past, if a policy owner decided that they no longer wanted the coverage the policy was given back to the life insurance company. With a life settlement, this is no longer the case. When an owner of a policy no longer wants it, for any reason, they can sell it for cash.
In most cases, a life settlement is geared towards those who are 65 years of age or older and have a significant net worth. Estimates have shown that more than 50 percent of policies among this group have a market value in excess of the present cash value. For this reason, it often times makes sense for the policyholder to sell and collect the money.
Of course, there are some criteria for a life settlement transaction that you need to be aware of. Some of the most common include: age 65 or older, $100k minimum face value, low cash surrender value, policy has been active for at least two years, and premiums that are less than 8 percent annually. On top of this, qualifying types of insurance include: term, universal life, whole, variable life, survivorship, joint first to die, and adjustable life.
Although there are some requirements, many people are in position to take advantage of a life settlement transaction.
It is important to realize that a life settlement transaction is complex. This is not something that you can think about today, and do tomorrow – there is a lot of work that goes into the process, and many people who are involved. Most life settlements are conducted on behalf of the policyholder by an experienced financial professional including: accountants, attorneys, wealth managers, financial planners, estate planners, charitable trust officers, and insurance advisors among others.
A provider is the purchaser of the policy, and is responsible for paying the client more than the current cash surrender value. A provider must be licensed in the state where the policyholder lives. At this time, more than 40 states have regulations that govern the sale of life insurance policies.
If you are interested in selling your policy you may want to hire a life settlement broker. These professionals specialize in bringing together buyers and sellers. While a broker will require a fee, they spend a lot of time shopping a policy around in order to find the best deal.
Even though life settlement transactions are becoming more common, the market has been around for nearly 100 years. Hopefully this information helps break down the different players involved in the life settlements industry so you have a better idea of who you will be dealing with if you enter this market.