Every year, seniors surrender or lapse as much as $200 billion in life insurance benefits without realizing the significant value they could get from selling their policies in a life settlement. Just as you wouldn’t vacate your house without receiving its fair market value, seniors who abandon their life insurance policies without recovering some of the money they put into this investment can miss out on generous payouts.
Often regarded for their future value, life insurance policies contain significant intrinsic value today. When policyholders recognize that their policy is an asset and gain an understanding of its worth, they can use the proceeds from a life settlement to fund any range of costs that accompany getting older—from long-term care to retirement expenses. On this page, we provide you with a comprehensive overview of life settlements with information about their uses, different forms of payouts, and resources to help you explore this topic in greater detail.
What is a life settlement?
A life settlement is the sale of an existing life insurance policy (typically by seniors) to a buyer (typically an investor) who takes over the monthly premium payments while the insured person is still living. In exchange for relinquishing their right to pass down the policy’s death benefit, the seller of a life insurance policy receives compensation on average four times greater than the policy’s cash surrender value but less than the full death benefit. In certain cases, the proceeds may be tax-advantaged and can be used towards paying for retirement expenses, medical bills, long-term care, or anything else you wish—it’s your money to use however you choose.
As seniors reach their retirement years, there are a number of reasons why they may elect to sell their life insurance policy. For example, they may no longer need their policy or be able to afford the premiums. The reason they initially purchased the policy may have become irrelevant in the years since they bought it; for example, if the insured outlives their beneficiary or if their children are now adults and financially independent. Regardless of the reason, when seniors find they no longer want or need their life insurance, they can opt to sell their policy and tap into its market value instead of letting it lapse or surrendering it for little to nothing.
If you meet the requirements for a life settlement (see the next section), we highly recommend having your policy evaluated to estimate its life settlement payout, if for no other reason than to understand the market value of this asset. To see how much your insurance could be worth in a life settlement, enter your policy details into the Retirement Genius life settlement calculator for evaluation by our experts.
Here are a few essential points about life settlements to keep in mind:
- Just like any other asset, it is every policyholder’s right to sell their life insurance policy to a buyer who will take responsibility for premium payments and receive the death benefit.
- Life settlements provide a higher fair market payout than you would get from cancelling your policy or letting it lapse.
- You can use the funds from the policy sale on anything you want—from medical bills and long-term care to your dream vacation…it’s your money to use however you wish
- Life settlements allow you to lower your monthly retirement expenses by removing the burden of high monthly premiums.
Who Qualifies for Life Settlements?
The insured person must be at least 65 years old to qualify in most cases. Younger insureds with significant health impairments may qualify.
Any $100,000+ Policy
Any type of policy––including term, universal, and whole––with a death benefit of $100,000 or more is eligible. There is no maximum death benefit.
Decline in Health
Health impairments and a lower life expectancy may increase the value of your policy and allow younger people to qualify.
What are the different life settlement payout options?
Cash, annuities, long-term care—sellers of life insurance policies have a myriad of options when it comes to how they get paid for the sale. You can even choose a combination of payout options to find a solution that best fits your needs.
Instead of cancelling your life insurance policy after spending years paying expensive premiums, you can sell your policy in exchange for a lump-sum cash payment. The policyholder can then use this generous cash sum to address any of their financial needs.
If you develop specific health needs as you become older, you can settle your life insurance policy for a long-term care (LTC) benefit account: an irrevocable and tax-advantaged benefit account that makes automatic monthly payments towards the insured’s senior living or long-term care. If the insured person passes away before all of the funds in the account are spent, any remaining balance goes to the account’s beneficiaries.
A policyholder can sell their life insurance policy in a life settlement for an alternative financial vehicle such as an annuity. If a policyholder is worried about outliving their money in retirement, enrolling in an annuity could ease this concern by ensuring a lifelong stream of income
For policyholders who don’t want to relinquish their right to their policy’s full death benefit, a life insurance policy can be settled for a reduced death benefit. Policyholders who can no longer afford to pay monthly premiums can use this option to pass the burden of any future payments to a life settlement buyer. A reduced death benefit settlement keeps a portion of your policy active and continues to give your beneficiaries financial security while reducing your monthly expenses.
How do life settlements work?
The process of a life settlement generally takes between 60 and 90 days, so it is best to begin the planning process as soon as possible. The policyholder first has to decide whether to pursue a brokered or unbrokered settlement:
- In a brokered settlement, the policyholder sells their policy through a life settlement broker who shops their policy around to different providers—typically investors—in exchange for a commission.
- In an unbrokered settlement, the policyholder sells their policy directly to the buyers of life insurance policies—typically life settlement providers—who will not charge any fees for transacting a life settlement.
With either option, the providers will review the policy and the insured person’s medical records as part of the policy valuation process. In general, life settlement providers will pay more for policies with higher values and older, health-compromised seniors. This is because a shorter life expectancy means the provider has to pay fewer premiums before receiving the death benefit. Policyholders usually receive between 10% and 50% of their policy’s face value.
Resources like Retirement Genius’s life settlement calculator can help you gauge the payout your policy may receive.
When the provider makes an offer the policyholder accepts, the closing process will look similar to that for a house purchase, involving closing contracts and change of ownership forms, except that life settlements can close completely remotely. Once the settlement has concluded, the provider pays the policyowner based on the elected payout option. The provider then takes over the policy’s premiums and receives the death benefit when the insured dies. With thousands of transactions completed every year, this option is a profitable, yet often underused, way to tap into the value of your life insurance.
Life Settlement Calculator
For policies greater than $2.5 MM to please call 866-602-5000 to speak with a specialist.
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Though often overlooked, life insurance policies are one of the most valuable assets many seniors own. As the realities of aging, retirement, and healthcare costs start to cast a shadow over your finances, a life settlement can help you tap into the value of your policy and protect yourself against these mounting costs, regardless of your policy type. Pursuing a life settlement can do a world of good for your finances in your long-awaited retirement years—funding medical costs, supporting increased living expenses, or even minimizing the pressure of debt.
Here are a few crucial takeaways to keep in mind as you consider how a life settlement could affect your finances:
- If you are a senior or have a terminal chronic illness, life settlements allow you to get the maximum value out of your life insurance policy.
- With a life settlement, you can monetize one of your highest-valued assets without having to worry about transaction or application fees and, taxes.
- Selling your policy allows you to escape the burden of high monthly premium payments.
- You have several payout options available to you, including a lump-sum cash payment, long-term care benefit account, alternative financial instrument, reduced death benefit, or a combination of these.
- Money from a life settlement can be spent any way you want: to fund retirement expenses, preserve your estate, or pay for costly medical services or long-term care.
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