Life Settlements

What’s a Life Settlement?

A life settlement is when a senior over 65 years old, sells their life insurance policy to a specialty company (a provider) for a variety of reasons. The provider becomes the beneficiary and collects the death benefit.

Federal law enacted the secondary sale of life insurance over a century ago. Life settlements are safe & regulated transactions in the U.S. FINRA and most state financial regulatory agencies oversee the life settlement industry.

The process of selling a life insurance policy is similar to selling a home in many ways. The sale takes 30 days or more and involves a bit of paperwork. Everyone’s situation is different. Payouts can be tax-favored and higher than the cash surrender value or approximately 40-80% of the death benefit. Life settlement brokers are fiduciary guides who can help safeguard the sale and ensure you get the highest offer. Much like a real estate agent, they are paid a fee for their performance.

Term life insurance, whole life, and other permanent policies can be sold. However, not everyone qualifies for life settlement. Eligibility is based on age, health, and policy characteristics. Health and policy characteristics determine the payouts. Good health does not necessarily disqualify a life settlement.

Life settlements are similar to viatical settlements except viatical settlements for clients of any age with a terminal or chronic illness and may be more tax favored.

Overall, life settlements are a powerful retirement tool but not many people know about them. Surprisingly, every year life settlements provide thousands of people more money than they expected from their policies.

How to Sell Your Policy for the Highest Payout

What to know

1. Eligibility
2. Pros & Cons
3. Alternatives
4. Companies
5. Process & Taxes
6. Examples
7. FAQ’s
8. Resources

Eligibility

1. Must be over 65 years old
2. Policies must be at least 2 years old
3. The face value or death benefit is generally above $100,000

1. HIPPA: Allow access to 3 years of medical history.
2. Life Release: Allow carriers to provide policy copy and illustrations.
3. Disclosure: Agreement to terms of service.
4. Closing Documents: If an offer is accepted.

Pros & Cons

PROS

• Help replenish your retirement fund.
• Help cover debt, medical, long-term care, or living expenses.
• Improve the quality of life for yourself and others.
• 5x the cash payouts on average (LISA). Term policies apply.
• Keep the original intent of the policy.
• Pocket future premiums.
• Possible tax-favored benefits.

CONS

• Beneficiaries will not receive the full death benefit.
• Loss aversion: A misconception of life insurance as property that can be sold like a home.
• Possible increase in Medicare Part B premium
• Possible Medicaid ineligibility.
• Your creditors can claim proceeds.
• The process takes time & paperwork.

Alternatives

• Keep the policy and pay the premiums.
• Stop paying and lapse the policy.
• Cash out with the life insurance carrier and forfeit the additional life settlement benefit.
• 1035 exchange the policy into an annuity.
• Check if your policy has Accelerated Death Benefits (ADB).
• Consider a policy loan if possible.

Choosing the Best Viatical Settlement Company for You

Selecting a top life settlement company is important to getting the highest payout for your life insurance policy. Make sure you are working with a licensed, reputable life settlement company. Here are the different types of life settlement companies you should consider;

LIFE SETTLEMENT PROVIDERS

Providers are specialty licensed life settlement companies who are the ones who essentially buy your life insurance policy from you. They are the ones making the offers. They represent multiple funds owned by institutional investors. Providers buy large portfolios of life insurance policies. You should know that providers are NOT fiduciaries and their goal is profitability. It is not in the consumer’s best interest to work directly with a life settlement provider. However, providers are the trusted source of liquidity and are held to a high ethical standard.

Top Life Settlement Providers

• Coventry & Coventry Direct
• Abacus Life
• Berkshire
• Maple Life

LIFE SETTLEMENT BROKERS

Unlike providers, life settlement brokers are licensed agents who have a legally bound fiduciary duty to their client’s best interest. Consider a life settlement broker like a real estate agent. Brokers are paid a fee to represent you, the seller, and list your policy at auction among the top providers who are competing to buy your policy thus creating a fair market value. The goal is to negotiate multiple offers increasing the payout amount. Some life settlement brokers have been known to charge excess fees so make sure they can justify the cost upfront accordingly.

Top Viatical Settlement Brokers

• Bridge
• Life Insurance Settlements
• Ashar Group
• Welcome Funds

Life Settlement MARKETING COMPANIES

There are lots of marketing companies posing as life settlement brokers and providers but are not licensed and often serve providers to generate customers. Do your research and ask if they are a licensed entity.

Understanding the Process & Taxes

Life Settlement SALES PROCESS

1. Application
2. Offer(s)
3. Closing
4. Transfer Funds

LIFE SETTLMENT TAX CONSIDERATIONS

1. You’re typically not taxed on the amount you paid into the policy called your cost basis (see examples below)
2. Settlements are considered tax-favored for terminal illnesses and/if rolled into long-term care or other medically necessary care
3. Not tax advice: Check with your tax professional, state and federal tax offices.

Real Life Examples

MEET BILL

Bill was looking to finally retire at age 71 from his law practice. He wasn’t sure why he was still paying on a $2M convertible term life insurance policy that was originally intended for his children who have long been out of the home that was now paid off. He decided to sell his policy with a life settlement broker who was able to get $550,000 he never expected. Bill didn’t have to pay taxes on $400k of the proceeds he used to pay for experiences with the family while keeping an end-of-life nest egg for his wife.

MEET PAM

Pam was 67 and could no longer afford her $250,000 universal life insurance policy. She was able to sell it for $50,000 to help cover bills, take a vacation, and add to her retirement account.

FAQ’s

Additional Resources

Life settlements are a safe option for anyone age of 65 or over looking to get money out of their existing policy for a variety of reasons. Although a life settlement is not for everyone, it’s important to consider all your options to get the help you need. If you have any questions regarding the resources below contact one of our licensed life settlement agents.