Life Settlements: A Viable Option for Today's Seniors

Summary: Life settlements can be a viable option for seniors interested in selling their policies and receiving payments far greater than the cash surrender value.

Life settlements can be a viable option for seniors willing to exchange their life insurance policy for immediate cash. A life settlement is the sale of an existing life insurance policy for a lump sum of money. It allows policyholders to access the fair market value of their life insurance by selling their policies and receiving payments greater than the cash surrender value. Technically, a life settlement contract allows you to sell your insurance policy to a third party in exchange for a reduced amount of the face value. This is possible because a life insurance policy is actually property, like a car, house, stocks and bonds that can be legally sold. A life settlement essentially lets you extract value today from an asset that is generally thought to only have a benefit when you die. Typically, life settlement transactions involve life insurance policies of a large face amount; "key-person" coverage or corporate-owned life insurance; or policies representing excess coverage that is no longer needed. Here's how a life settlement works: When a life settlement company buys your life insurance policy, it pays you a percentage of the policy's face value. Then the life settlement company becomes the new beneficiary of the policy at maturation. As such, it is responsible for all paying all future premiums and collects the entire death benefit when the insured dies. A Growing Industry With a life settlement, you can receive a large sum of cash in exchange for your insurance policy while you're still alive. This eliminates premium payments, accommodates the changing needs of your dependents and provides greater financial flexibility. Life settlements can also be used for charitable giving. Complex estate and tax planning strategies can apply when using life settlements in a planned giving program. But here's how this works in simplest terms: You donate your life insurance policy to a charitable organization, which immediately sells the policy for a lump sum of cash via a life settlement. These and other benefits are making life settlements an attractive option for seniors with unwanted/unneeded insurance policies. Consequently, the life settlement industry has seen significant growth in recent years. A study by Conning & Co. Research found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Since 2003, more and more of these eligible senior clients have sold their policies and helped the market increase. Separate research by the University of Pennsylvania's business school found that life settlement providers paid approximately $340 million to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before. "We estimate that life settlements, alone, generate surplus benefits in excess of $240 million annually for life insurance policyholders who have exercised their option to sell their policies at a competitive rate," according to the research. Selling Your Policy You could be a prime candidate if you are of retirement age, have paid off your mortgage and other debts, and no longer require the financial protection of life insurance. The amount you receive will depend on your age, health, death benefit, and the number of years your policy has been in force. Seniors with the greatest chance of selling their policies are those that are older than 65 years of age, have a calculated life expectancy of more than two years (but less than 10 years) and may have experienced a health change that has led to their insurance premiums increasing. Depending on the policy holder's life expectancy, just about any type of policy can be sold, including universal life, whole life and convertible term contracts. However, policies generally must be valued at least $100,000. Determining whether to sell your life insurance policy is a purely personal decision. You might consider a life settlement under the following circumstances: