What Are Life Settlements And How Do They Work?

When most people think about their life insurance policies, they imagine a payout that will help their loved ones financially after their death.

However, there’s another option for those with larger life insurance policies: selling them through a life settlement.

If you’re not sure what that is or whether it’s the right choice for you, keep reading. We’ll explain everything you need to know about life settlements in detail below.

A Brief Look at Life Settlements

Before we jump into what life settlements are and how they work, let’s first explain some key points you might need to know about them.

First of all, life settlements aren’t something you can get right away. To be eligible for a settlement, the person on the policy must be over age 60 and have had their insurance policy in place for at least two years. It prevents people who took out a large policy recently from selling it off without having time to make payments on it.

Secondly, you need to prove that your life insurance policy is payable in the event of your death. If there are any outstanding loans on the policy or if the premiums haven’t been paid for two years before the sale, you won’t be able to sell your policy.

Lastly, since life insurance policies are used as collateral for loans, there is no guarantee changing the policy’s ownership will work out well for you. You’ll need to choose a company specializing in life settlements and ensure that they’re giving you an offer worth accepting.

Life Settlement Processes Explained

Once you’ve been approved, there are a few steps you’ll need to take before the sale is completed.

First of all, the settlement company will have an attorney review your policy and let you know how much it’s worth. After that, they’ll send their offer to your life insurance company, and the company will have to give their approval.

The insured will then receive a closing package with the documents to confirm acceptance of the offer. Finally, the client will sign the transfer-of-ownership forms and wire money to cover the settlement company’s fee.

At that point, the settlement will be complete, and you’ll receive a check or bank draft for your new lump sum.

If your life insurance company approves the offer, you’ll have a certain amount of time to cancel the policy after that date. When this time is up, the settlement company will send you a check for the full value of your insurance policy. Along with that, they’ll send a payment for all future premiums plus interest.

Life Settlement Financial Benefits

Life settlements aren’t just financially advantageous, either. They offer new policy owners a way to buy coverage that they wouldn’t qualify for otherwise. Even people with high blood pressure and other issues that would typically make them uninsurable can sell their policies and benefit from the remaining balances of the policies.

You also don’t have to pay any more premiums once you’ve sold your policy to a life settlement company, and the new owner can choose how they want to pay for it. Many companies will let them make installments and one-time lump sum payments.

At the same time, selling your life insurance policy through a life settlement means you get all of the money from it upfront. You can use this for anything you wish, so it’s a win-win situation.

Many people don’t realize the benefits of selling their life insurance policies through a life settlement company until they sit down to consider their options seriously. By talking with an agent and looking at all your choices, you can make an informed decision about what you want to do with your policy.

The whole process can take as little as a few weeks, and it usually doesn’t require that you meet with anyone face-to-face. Selling your life insurance policy through a life settlement company lets you look out for your financial well-being while allowing the new owner to enjoy its benefits.

What Are the Four Most Common Settlement Options?

The following are the most common settlement options offered to people who sell their life insurance policies through a life settlement company.

Interest Option

Interest option is whereby the insurance company holds the proceeds of the life insurance policy until all premiums are paid. The beneficiary receives the interest until when they pay withdraws the principal.

Fixed Period Option

In the Fixed Period Option, when a person sells their life insurance policy to a settlement company, they have the option of selecting a particular period when the beneficiary could receive the payout. After that, no further premiums are paid, and in this case, too, interest accrues until all the premiums are paid.

Fixed Amount Option

The fixed amount option is where the insurance policy beneficiary gets a certain fixed dollar amount in periodic installments until the principal amount and interest are completely paid.

Life Income Option

In the life income option, the beneficiary receives a stipulated amount throughout their life. The amount is often in the form of a commercial annuity.

Who Can Benefit From Life Settlements?

If you would like to find out if selling your life insurance policy through a life settlement company might benefit you, certain people would do well with this option. They include:

People Who Can’t Get Life Insurance Any Other Way

People who have health conditions or are too old to qualify for normal life insurance now risk not finding coverage at any price. They can sell their policy through a settlement company and enjoy full benefits, despite their previous history with the company.

People Who Want Money Now

If you need money now but don’t want to take a loan or cash out your savings, selling your life insurance policy is a great option. It lets you get money now and keep the coverage you love as well.

People Who Don’t Need the Coverage Anymore

Those who have enough coverage or no longer need life insurance can sell their policy to a settlement company and enjoy full benefits, knowing that they’re helping someone else out as well.

How Is The Life Insurance Policy Valued?

In cases involving critical illness or disabilities, settlement companies usually value the policy more. It’s because even though it may no longer be in force if a person becomes incapacitated and cannot work, they will need to rely on insurance benefits.

Likewise, when someone dies before their term of coverage is up. Still, after paying premiums for several years, the beneficiary can receive much more money from the life settlement than they would have if the person had let it lapse.

The Bottom Line

Whether you are a policyholder looking to sell a life insurance policy or considering purchasing a life settlement, you must understand how these transactions work. Life settlements can be beneficial for both buyers and sellers.

Policyholders can receive a lump sum payment that they may not have otherwise received if they had kept their policies until death. People who buy life settlements get discounted rates on policies compared to buying them on the open market.

That said, make sure you do your research to find a settlement company that will give you a good offer.