- What is a life settlement?
- August 9, 2013
A life settlement allows a person to sell a life insurance policy and receive a cash amount higher than the cash surrender value. The policy ownership is transferred to an unrelated investor in exchange for a cash payment in excess of the policy’s cash surrender value.
The industry has been troubled by a high number of unethical, illegitimate operations. These operations have gone after potential violators in an aggressive manner. These companies have given the industry a bad name and led to more regulations.
Most people confuse life settlements with viatical settlement. However, the fundamental difference between the two is that with viatical settlements the insured must be terminally ill. Life settlements do no require the insured to be terminally ill, but they must be a maximum age, and the amount of settlement will depend on their age and health.
There are some common similarities among these settlements, which are:
-The person – generally has a terminal illness – selling the life insurance policy is the viator and they will receive money from the settlement. This person gives up ownership of the policy in return for cash now.
-A settlement provider is the person or company that buys the life insurance policy. The buyer becomes the policy owner and takes on all the responsibilities and benefits of the policy.
-The person or company who represents the seller and can “shop” for offers is a settlement broker. The buyer pays the broker a commission if the sale is complete.
-An accelerated death benefit (ABD) is a feature of a life insurance policy that typically pays some or all of the policy’s death benefit before the insured dies, which is another way of getting cash from a policy without a third part.
There are certain issues to keep in mind when dealing with life settlement, which are the following:
When dealing with life insurance, most companies require that the insured be a minimum age of at least 65 or older. The policy usually has to have a minimum death benefit of $250,000.
This may be useful when a policy is not performing up to expectations.
The life insurance is not needed in a business insurance situation such as a “key person” or a “buy-sell” agreement where an insured leaves and the policy is not longer necessary; or when a loan secured by life insurance has been paid in full
The proceeds from the life settlement can be used to provide cash gifts to family members; or provides funds for charitable giving or to establish a charitable remainder trust.
The policy is beyond the two-year contestability period.
Useful when an insured person’s health has substantially worsened since policy’s issue date and/or current life expectancy is between two and 12 years. Returns to investors are above average, sometimes reaching 12 percent or more; the shorter the lifespan, the greater the return.
The investor incurs significant transaction expenses, including underwriting, commissions, reinsurance, administration, and taxes on the gain at death. Commissions to financial advisors, brokers, and independent agents with a life insurance licenses generally range from four percent to six percent of the amount paid for the settlement.
The policy may be resold multiple times.
There is a lack of privacy – ongoing tracking of the insured person’s heath and medical records until death.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.