What is a Life Settlement?
A life settlement is the sale of a life insurance policy to an investor for a lump sum of cash. The amount received is greater than the policy’s cash surrender value, but less than the death benefit. On average, life settlements pay 3 to 4 times the amount of a policy’s cash surrender value.
All aspects of ownership transfer, including the premium payments and death benefit, meaning the initial policyholder’s beneficiaries no longer get anything upon the passing of the (previously ) insured.
Folks frequently pursue life settlements when they need money to pay for retirement, long-term care, or other expenditures.
Our guide below offers in-depth information regarding life settlements, the process, pros and cons, and more.
Table of Contents
Why Sell Your Policy?
A life settlement is a major financial decision, and there are many reasons why seniors make it. Let’s go over the five most common reasons life settlements are made.
1. Medical Care
Experts say that a 65-year-old couple retiring in 2019 will need $390,000 to cover medical expenses. People tend to forget about various expenses such as dental care, an expense that is not covered by Medicare. Additionally, the cost of medicine and procedures is not the only factor to consider. Assisted living facilities alone can cost $48,000 per year on average, according to financial institutions.
2. Covering Health Insurance Costs
Based on research led by the Center for Retirement Research at Boston College, the average retiree spends around $4,300 per year on health insurance, and the cost of health insurance (COI) continues to rise. For many seniors, a lump sum from a life settlement provides financial comfort in the face of rising health insurance costs.
3. Supporting Family Members
Many seniors also opt for life settlements in order to help a family member through financial difficulties (medical bills…) or important life events (down payment on a house, college tuition…). Many retirees in the United States do not have the immediate liquidity to help, but a life settlement can fill that gap.
4. "Aging in place" home renovations
In 2015, the National Council on Aging interviewed over 1,500 retirees, and drew many conclusions on what matters most for them. One of them is the wish to “age in place”. A surprising 75% percent of respondents intend to live in their current home for the rest of their lives, and 62% would like to see services that would help with home modifications and repairs.
Because of this home renovations can become major improvements to quality of life. And important home upgrades such as handicap accessibility updates can be expensive. As a result, many seniors use life settlements to make those necessary renovations and live in a home that better suits their needs.
5. Lifestyle enhancements
Many seniors are active and wish to enjoy their retirement on-the-go. With a financially stable family, many retirees do not see the value in keeping their life insurance. They would much prefer this policy become a significant vacation or experience. Life settlements are a viable option to help them reach these goals.
Life Settlement Process
Going through the process of selling your life insurance policy can be daunting, but it is actually quite straightforward. The process can slightly differ depending on your situation, but it will most likely go through 6 essential steps. And it’s important to note that typically, a life settlement process takes 90 to 120 days.
Step 1: Fill out an application. The life settlement form can be filled out online or by hand. The program will ask for basic personal information, along with questions regarding your life insurance plan. During the application process, you’ll be asked to sign release forms that permit access to your medical records and insurance policy information. These documents are essential to determine rates for cash payout.
Step 2: Collect the necessary documentation. The settlement company will use the release forms to collect your relevant medical records and policy details.
Step 3: Sit back as we review your information & search for offers. Investors will review your documentation and estimate the value of your life insurance policy accordingly. If interested, they will then make an offer (or bid).
Step 4: Receive offers from the investor(s). The life settlement provider will communicate the payout supply directly to you or your advisor (such as your agent or insurance broker). Multiple cash offers will allow you to get the highest market value for your policy. These offers may be negotiable, and you have the right to walk away from them at any time.
Step 5: Select the best offer and complete the “Closing package“. The closing package will include a series of documents that need to be signed by multiple parties. This includes but is not limited to:
- A Change of Beneficiary Form
- A Change of Ownership Form
- A Life Settlement Contract
- A Life Expectancy Report
- A Confirmation of Coverage
Once this step is complete, the payout can be processed, and funds will be transferred to you via check or direct deposit.
Step 6: Prepare for tax implications
To better understand tax implications behind life settlements, you can read our extended article here.
Do I Qualify for a Life Settlement?
Qualifying for a life settlement is two-fold, and will depend on the nature of your policy and your personal situation.
Most life insurance policies qualify for a life settlement. These include but are not limited to:
- Whole Life policies
- Universal Life policies (UL)
- Joint Survivorship Universal Life policies (SUL)
- Term Policies still convertible to Universal Life policies
Additionally, the death benefit of the policy should be $100,000 more more.
As a policy owner, you need to be at least 65 years old, or have a significant change in your health.
Benefits and Considerations
Choosing to sell your life insurance policy is an important life decision. See our list of pros and cons below.
Risks of Life Settlements
A life settlement is an important financial transaction, and we want to make sure you know the potential risks before committing to the process. The following are items to consider before making your decision.
The life settlement process requires the collection of personal information such as medical records in order for investors to formulate an offer. Cedar Life Settlements is committed to the highest standards of privacy and ethics, ensuring none of your personal information is shared without your written permission.
The life settlement timeline is massively important, and will likely affect your liquidation goals. The average timeline for a life settlement is 90 to 120 days, but this could be accelerated if the collection of personal information is done quickly.
Our recommendation is to consult with a tax professional before closing a life settlement transaction. Every situation is different, and you should be aware of these differences to ensure total understanding.
Additionally, you can read our in-depth article regarding life settlement tax implications.
A life settlement will partly or completely waive the death benefits from your policy. And while we know some people may find discussing death and its financial consequences uncomfortable, it is important to discuss these matters with family members and experts to make sure a life a settlement is the right fit.
How Much Can I Expect?
Based on the life insurance policy and its owner’s medical records, investors will evaluate the value behind the investment.
More specifically, investors will look over three main factors:
Death Benefit: This is the face value amount of the policy.
Future premiums: These will be paid by the investor until expiration of the policy.
Life expectancy: Life expectancy is measured based on many data points and complex algorithms. Investors will use national data (such as the Social Security Administration’s calculator) in congruence with your personal medical records. Based on your general health, level of exercise and family history, investors will estimate accordingly. There are many online calculators you can use to reach relative figures.
In order to simplify the process and give you a rough estimate, our team of experts built a calculator to give you an estimate in real time. The algorithm is based on industry and proprietary data.
Check our life settlement calculator today!
Why Cedar Life Settlements?
Cedar Life Settlement acts as a broker on your behalf to help you maximize the value of your life insurance policy. Most people usually get one single offer: a cash surrender payout from their insurer or a life settlement from just one company.
By simply filling out the form at the top of the screen, our team will instantly match your policy with investors and allow you to compare offers. As companies compete for your business, you will be able to select the best offer for you.
Founded on the notion that all people deserve equitable treatment in financial matters, Cedar Life has elected to be a legally-bound fiduciary.
Cedar Life Settlement is also working towards a B-Corp Certification (Which you can learn more about here).
Data has become a commodity for sale and for theft in the digital age. By utilizing Google Cloud as the backbone of data storage and transfers, client information is protected by digital security.
Led by a team with experience from some of the largest U.S.-based financial institutions, Cedar Life can help you and your clients remain up-to-date on modern best practices for handling sensitive and significant transactions.
You can read more about us here.
Frequently Asked Questions
Anyone who currently holds a life insurance policy may qualify for this service. Details specific to each applicant however will determine the likelihood of receiving offers. Please complete our form to learn more about your eligibility.
HIPAA Privacy Rule defines all obligations relating to the transfer of medical information. Cedar Life Settlements is committed to preserving your privacy, and discloses personal information only with the written consent of the policyholder. Only information required to complete transactions is disclosed, and such information is disclosed only to those parties directly involved in the transaction.
Although the life settlement market has seen immense growth over the last 20 years, with payments being made on more than $11.4 billion in policy face value since 2010, most states do not require life insurers to disclose the option of a life settlement to people who surrender a policy. In addition, when compared to stocks, bonds, and other investment vehicles, life settlements remain a small portion of the total amount invested each year. Our responsibility is to help policyholders and financial advisors understand when a life settlement may or may not be a useful option.
Only selling a part of your life insurance policy is a transaction known as a retained death benefit (RDB). Effectively this results in no obligation to make premium payments, retaining a portion of the face value of your policy, and receiving a cash amount for the portion of your policy for which you do not retain benefits.
Once a policy is transferred from the original policyholder, the original policyholder (seller) will no longer be required to make any payments on the policy. In order for the buyer to collect on the policy, the buyer is responsible for making any payments to keep the policy in force.
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