A life settlement involves the transfer of a life insurance policy to a third party or entity in exchange for a cash payment that is typically less than the policy’s full death benefit.
Basic Examples of What Life Settlements Mean
Term Life Insurance:
Typically with term policies a policyowner expects no cash value or return of premium unless the contract includes a rider of such. It’s not uncommon for term policyowners over 65 years old to safely sell their term life insurance policy on the secondary market due to factors such as health and policy characteristics.
Jim had a $1M term policy that was going to get too expensive upon renewal. The policy was before the conversion (able to convert to whole life before the window closed). He was expecting nothing in return but was able to sell it for $30,000 cash.
Whole Life Insurance:
Whole life policies have a cash savings component so policyholders know its worth more than nothing. However since life insurance carriers want to avoid paying out death claims and since they have a type of monopoly on policies they will offer what they want. Like selling your home to only one buyer who determined the price. Doesn’t make much sense. Selling a policy on the secondary market can possibly net the seller multiples in added value.
Sue had a $500,000 whole life policy with $75,000 in cash value that she wanted to cash out. She discovered a life settlement alternative and was able to cash out her policy for $220,000 netting her $145,000 in additional value. Unlike one buyer who offered Sue $110,000 her broker was able to squeeze an additional $35,000 covering the broker fee and adding an additional $6,000 to Sues pocket.