Updated: Jan 31, 2019
A life settlement occurs when a third party purchases an existing life insurance policy for more than its cash surrender value. This is a better result than allowing a policy to lapse or be surrendered for a much lower value.
An alternative to lapsing or surrendering a life policy would be to settle the policy for a value greater than what you could surrender it for.
Often times a term policy, with no value, can also be settled. A settlement is not an alternative to retaining a policy and should be carefully analyzed prior to undertaking a settlement and letting go of a valuable death benefit.
A settlement investor will forecast and project, based on numerous factors, what the investment could return in double digit compounding rates of return upon the insured’s death. Before embarking on a settlement, beware that you are foregoing an opportunity for the insured’s beneficiaries of receiving a valuable benefit.
However, keeping a policy may not be a viable option if it is no longer needed, wanted, or more importantly affordable and the policy is about to be lapsed or surrendered.
A life insurance policy is regarded as property and thus as with any piece of property, can be sold by the owner. The best policies to settle are Universal Life and Term Insurance which is convertible. However, Whole Life policies and some Survivorship policies with older insured may also be considered.
Life settlements are regulated and forty-two states have comprehensive insurance laws covering over 90% of the US population. Statistics bare out that policy owners selling their policies may receive a lump sum payment that sometimes is as much as 4-8 times greater than if they surrendered or lapsed their policy.
Six states now mandate disclosure of the settlement option when an individual policy holder contemplates surrendering or lapsing their policy. Eventually, more and more states will begin to regulate this option. Thirty states have a statutory mandated 2 year waiting period before a policy can be sold, while eleven states have a 5 year waiting period. Even though there are waiting periods, some states allow a sale to occur prior to the waiting period if certain criteria is met. Criteria could include: owner/insured being terminally or chronically ill, a pending divorce, retirement, or physical or mental disability. Substantial consumer disclosure is required by most states and includes disclosing compensation paid to the life settlement brokers; transparency being a key part of the life settlement. Regulation appears to be working since the National Association of Insurance of Commissioners (NAIC) adopted the consumer information system beginning in 2012, there have only been two consumer complaints involving settlements since 2012. An excellent measure of the success regarding how well the market is functioning as it relates to consumer protection.
The act mandates that insures are required to provide written notice to policy owners who are facing a lapse or surrender of their policies. This notice states that the policy owner has options regarding such lapse or surrender and that one of them be a life settlement.
Settlements are now being endorsed by many states as a valuable resource to individuals and governments in addressing the long term care crises in America.
The government is concerned about keeping tens of thousands of individuals off of the burgeoning Medicaid roles. Thus saving Medicaid hundreds of millions of dollars annually is a realization of the life settlements’ market’s tremendous social benefits.
If you are an individual age 70 or older, who no longer requires life insurance or is unable to continue paying for it may be wise to consider a settlement as opposed to surrendering or just lapsing the policy for no return value.