Life settlements have become increasingly popular in the last three decades as seniors no longer need life insurance policies they’ve held onto for years. But is a life settlement the only option for someone who no longer needs their life insurance? What if you still need life insurance, but your policy and premiums are just too big?
Life Settlement Definition
A life settlement allows anyone over 65 to sell their life insurance policy to a third party. You will sometimes see this referred to as a secondary market. When the Supreme Court determined that life insurance policies are property; that opened up the way for people to buy and sell them.
The goal of the seller is to get more for a life insurance policy that they don’t need than the life insurance company would offer them if they surrendered the policy for its cash value.
The goal of the buyer is to buy a life insurance policy for a fraction of the death benefit. They become the beneficiary and take over premium payments.
This way the seller gets rid of a policy that is no longer useful and costing them money every month and the buyer receives a massive payout sometime in the future when the seller dies.
Who is a Good Candidate for a Life Settlement?
While life settlements are not for everybody, they can be fantastic for the right people. But how do you know if you’re the right person?
If you fit into the criteria below, then pursuing a life settlement might benefit you.
- You don’t need life insurance at all
- Maintaining your current life insurance is a burden
- You have better uses for the money you put toward life insurance premiums each month
- The beneficiaries of your life insurance policy don’t need the money
If any of the points below feel familiar, there may be better ways to solve your challenge than a life settlement.
- You plan on getting another life insurance policy after selling your current one
- You still need life insurance, but the premiums are currently too expensive
- A surprise debt has come up, leaving you scrambling for cash
- You don’t need the money from the life settlement
- Someone pitched you a deal that sounds too good to be true
What Type of Policy Do I Need To Have?
You can sell nearly any type of life insurance policy as a life insurance settlement. Usually, life settlement brokers look for a whole life or universal life policy. They also will take term policies with a conversion option. (A conversion option allows you to turn your term policy into a permanent policy at the end of the term.)
Other conditions are that you’ve held the policy for at least two years. This one is to ensure that a life settlement broker isn’t paying someone to take out a life insurance policy on themselves and then selling it. Life insurance companies may dispute benefits if they think this is the case.
Most brokers will not consider a policy less with a benefit of less than $100,000. There are exceptions to this rule. If you think a life settlement may be right for you, it never hurts to get an appraisal.
Taxes, Medicaid, and Broker Fees
There are several costs associated with life settlements to be aware of. Don’t forget to calculate these to make the best financial decision possible.
Life insurance benefits are non-taxable. On the other hand, life settlements are taxable income. Keep this in mind as you calculate how much you expect to make on your policy.
The sale of a life settlement can also affect your qualification for government programs that have a limit to how much you have in assets or income. Medicaid, as an example, only kicks in after you’ve depleted most all of your assets. Make sure you don’t get disqualified from programs like this just for selling your insurance policy.
Like selling a house, you have to pay the person who brokered the deal. Broker fees can range anywhere between 10% and 30% of the total transaction amount. As the seller, you will pay those fees. You don't pay them directly, but they are subtracted from the proceeds of the sale of the policy.
Pros and Cons of Life Settlements
If you don’t need your life insurance anymore, there are several thousand good reasons (dollars) to sell your policy as a life settlement. You get more cash than you would have surrendering the policy, plus you don’t have to pay for it any longer. It can be a great deal.
On the other hand, if you just need to lessen your premiums to keep a policy you need, a life settlement can have negative impacts on your financial situation. You may not qualify for a new policy, or qualify at higher rates than you were paying.
Cash for emergency debts
Potential tax implications
No more premium payments
No death benefit for your heirs
Cash for a policy that was going to lapse anyway
Possibly affect Medicaid status
Can no longer take advantage of other policy provisions
Finding a Life Settlement Broker
There are a couple of ways of searching for a reputable life settlement broker or life settlement company. First, talk to your insurance agent and see if they have worked with anyone in the past who has done an excellent job for their clients. Insurance agents themselves are generally not licensed to buy life settlements, but often have those connections. You can also contact us to get an appraisal.
Second, you can check with the Life Insurance Settlement Association. They hold their members to the highest ethical and professional standards.
How to Get a Life Settlement
First, talk to your life insurance agent and financial planner about getting the life settlement. They can double and triple check that you won’t run into any problems later on.
Next, use the form on the left to get a life insurance policy appraisal. This will look at your life insurance policy, your current premiums, your expected lifespan, and your recent medical history.
After the appraisal, the life settlement broker will show you the offers from investors. (Caution, if you found a life settlement broker who didn’t get you more than one offer, it’s almost impossible to know whether or not you’re getting the best deal.)
Take the offers back to your financial advisor and double check the tax implications, as well as any effect it would have on any social security programs like Medicaid.
Choose whether or not to accept the best offer, and you’re done. They make it pretty easy. Just be sure to work with someone who is doing the legwork to get you the best offer possible, not the first offer that comes to the table.
Alternatives to Life Settlements
Life settlements aren’t right for every person, although they have significant advantages when they are. If you are due for a life insurance review, then talk to your agent about your options. Here are some alternatives to consider.
If your premium payments are becoming difficult to maintain and you still need your life insurance policy, talk to your life insurance agent about lowering your benefits. This reduces your premiums, making the policy easier to afford.
It also avoids the hassle of replacing the policy. FINRA found that roughly 50% of seniors taking life settlements applied for a new policy afterward.
Let an Heir Take Over Premium Payments
If you have a life insurance policy for estate planning, or to pass on wealth to your heirs, let them take over premium payments. It keeps the money in the family and will still be of benefit when you pass on.
Donate Your Policy to Charity
Insure a Better World Fund takes over life insurance policies like life settlement brokers do. They pay the premiums and become the beneficiary of the policy, donating the benefits to the charity of your choice.
1035 exchanges need to involve a tax advisor to ensure you aren’t accidentally breaking one of the numerous rules the IRS has to govern these.
A 1035 exchange allows you to transfer the cash value of one life insurance contract to another life insurance policy or non-qualified annuity without any tax burdens.
In this case, since you no longer need your life insurance policy, you might consider turning it into an annuity you can use during your lifetime. Be careful. You cannot receive any payment during the transfer. The money must go straight from insurance company to insurance company to avoid taxes.
Use the Cash Value to Pay the Premiums
If you’re going through a rough patch, you can use the cash value on permanent policies to pay the premiums. You can continue doing this until the entire cash value is exhausted. This can give you several months to years of coverage without a penny coming out of your pocket.
Cash Value Surrender / Lapse
If you no longer need the policy, you can surrender it to the life insurance company who will pay you the value of the cash accumulation. This is only for permanent life insurance policies and will be less than a life settlement option.
If you have a term policy, you can always let it lapse or not renew the policy at the end of the term.
Frequently Asked Questions About Life Settlements
There are dozens of ads on TV all pushing life settlements. As a result, we get a ton of questions about them and how they work. Below are some of the more common ones not covered in the sections above.
How is a life settlement different than a viatical?
A viatical settlement only covers people who are terminally ill, usually with less than 24 months to live. It came about during the AIDS crisis of the 1980s when AIDS victims needed the money to pay for treatment more than the life insurance death benefits.
As AIDS treatments improved life spans, the viatical market declined, but the idea gave rise to the life settlements market. The only difference is that life settlement companies buy policies from healthy people.
What is a single life settlement option?
This is another, less common, way of talking about life settlements. If you look up companies who buy single life settlement options, they explain the same concept as a life settlement.
Should I invest in life settlements?
If someone approaches you about buying life settlements, it’s probably a too good to be true situation. It’s difficult to make money buying just one. Buying groups is risky because you rarely get to evaluate each policy individually.
Unless you’re a Wall Street tycoon, it’s smarter to stick with investments that you can more easily analyze.
How Abrams Insurance Solutions Can Help
At Abrams Insurance Solutions, we are a family-oriented group of independent life insurance agents looking to make sure your family has the financial protection to weather life’s challenges. We work with only the most reputable life settlement brokers to make sure that you get the best deal possible for your unneeded life insurance policy.
Use the form on your left to get in contact with a life settlement company licensed in your home state today. Or if you have any questions, give us a call at (888) 905-0333. We are always here to help.