Overview
A life settlement is the sale of a life insurance policy to a third party for a lump sum cash payment that exceeds the policy’s cash surrender value but is less than its net death benefit. Essentially, the policyholder sells their rights to the policy in exchange for immediate cash, and the buyer assumes all future premium payments, acquiring the eventual death benefit.
Why Opt for a Life Settlement?
Life settlements offer a strategic financial solution for policyholders facing a change in financial circumstances or goals. The decision can stem from several situations:
- Retirement: Adjusting financial assets for upcoming retired life can make sustaining premium payments cumbersome.
- Costly premiums: High premium costs can make the policy unsustainable, particularly when original financial planning assumptions change.
- Emergency liquidity needs: Unforeseen financial requirements, such as medical bills or other emergencies, may necessitate accessing funds tied up in a life insurance policy.
- Change in beneficiaries: Sometimes, the original intent for maintaining the policy is no longer relevant (e.g., dependent children now being financially independent).
Legal Framework and Implications
In the U.S., life settlements are mostly legal and regulated, offering a clear framework for the transfer of ownership of insurance policies. Unlike stranger-owned life insurance (STOLI), which is illegal, life settlements require a genuine change in the policy owner’s financial or personal situation.
Life Settlements vs. Viatical Settlements
While both life and viatical settlements involve selling a life insurance policy, they cater to different needs and circumstances:
- Life Settlements: Typically involve policyholders who are elderly and no longer need the policy, or can’t afford premium payments.
- Viatical Settlements: Are meant for terminally ill policy sellers with a shorter life expectancy, typically less than two years, providing them with immediate cash for treatment or other needs.
Viatical settlements usually involve larger sums and more immediate benefits but are also riskier for investors due to the short expected lifespan of the policyholder.
Special Considerations
A life settlement might seem like a financially sensible choice, but it comes with implications, such as loss of death benefit for original beneficiaries and potential privacy concerns as the new policy owner gains access to certain personal information. Hence, it involves thorough consideration and, often, consultation with financial advisors.
Related Terms
- Cash Surrender Value: The amount an insurer will pay a policyholder if they cancel their voluntary life insurance agreement.
- Death Benefit: The money guaranteed to the designated beneficiaries identified in a life insurance policy, payable upon the death of the insured.
- Premium Payments: Recurring amounts paid into a life insurance policy in return for the death benefit.
- Estate Planning: The process of arranging the management and disposal of a person’s estate during their life and posthumously.
Further Reading
For those looking to dive deeper into the nuances of life settlements and insurance policies, here are some recommended books:
- “Investments Don’t Hug: Embracing the Life Insurance Asset” by Mark Bertrang
- “The Tools & Techniques of Life Insurance Planning” by Stephan R. Leimberg
Embarking on the journey of understanding life settlements can be as thrilling as finding fifty bucks in an old coat. But remember, navigating these waters without a guide (or a good financial advisor) could have you swimming with the financial sharks!
