Although life settlements are not new, they have become more popular recently. A life settlement occurs when an individual sells their life insurance policy for an amount that is greater than the policy’s cash surrender value. There are investors who are willing to buy the policy for the future death benefit. It provides the insurance holder with cash and offers the investor a potentially high return on their investment. The investor becomes the new beneficiary on the insurance policy.
Investors are generally willing to purchase life insurance policies from high net worth individuals with a fairly short life expectancy. The insurance holder may want the cash to invest in other investment vehicles or for other personal reasons. If there are investors willing to pay more than the cash value on the policy it is more advantageous to sell their policy to an investor than it is to cash it in with the insurance company. The investor is willing to pay more than the cash value and wait until the owner of the policy dies. When that happens, the investor will be paid the death benefit as the beneficiary on the policy. If the amount they receive is more than they paid for the policy, then they will make a profit.
The most common type of life settlements is senior settlements. Proceeds from the sale can provide the senior with cash necessary to pay for medical bills and living expenses or for travel and other personal reasons. It has been estimated that approximately twenty percent of all seniors are currently participating in life settlements.
To qualify for a life settlement, usually the policy holder will need to at least 65 years old, have an insurance policy with a low cash surrender value, and have a minimum face amount of $50,000. Some investors require face amounts that are much higher than $50,000. Insurance policies of all types are potentially eligible for a life settlement, including whole life, universal life, term (if it is convertible), adjustable life, variable, survivorship and joint first to die.
Investment firms and brokers who specialize in this area are available to assist with a life settlement process. There are brokers that can be hired who will circulate the insurance policy with various investment companies and work on their client’s behalf to negotiate the best deal.
Life settlements can offer the senior an infusion of cash which can be used for a variety of purposes. However, the main thing to keep in mind when considering a life settlement is that the investor becomes the new beneficiary on the policy which could affect a policy holder’s heirs and family.