Life Insurance Settlement Information

Life settlements are an important financial tool that many seniors know surprisingly little about. When used properly, life settlements can help supplement underfunded retirement accounts by converting an otherwise ‘idle’ life insurance asset.

A life settlement is the sale of one’s life insurance policy to an investor (typically a large financial institution or investment fund). In a typical transaction:
  1. the insured will get an upfront cash payout from the investor
  2. the ownership of the policy will be transferred to the buyer
  3. the buyer will be responsible for paying the policy’s premiums
  4. when the insured passes away, the policy’s death benefit will be paid to the buyer

Reasons to Consider Selling Your Policy

Generally, you should consider a life settlement if your personal circumstances have changed such that the policy no longer fits your financial needs. Here are the 3 most frequent reasons why one might consider a life settlement:

Unaffordable Premiums 
Expensive premiums is generally the most common reason for selling a policy. When the insured had a full time salary, the premium payments were not a problem, but now that the insured is living off of a retirement income, the policy can become unaffordable. Additionally, in some policies (like Universal Life policies), the premiums can escalate as the insured ages.

Large Upcoming Expense
Life settlements can provide capital for individuals who have a large upcoming expense. Some common examples include paying for uncovered medical expenses or retirement home expenses. Others have used the money to fund a grandchild’s college tuition or to improve the quality of their retirement.

No Longer Necessary
Typically, life insurance is purchased to protect one’s children in case of an unexpected passing. However, some individuals may decide that because the kids are now full-grown, independent adults, the safety net is no longer necessary.

How Much Money Could I Get For My Policy?

The average life insurance policy sells for roughly 20%-25% of the policy’s benefit amount. For instance, if you were selling a qualified $500,000 policy, you would receive on average $100,000 to $125,000. However, understand that it is highly case dependent. Here are the general factors will affect your offer: 
  • Policy Size: the larger the policy, the more you will receive
  • Age & Life Expectancy: the older the insured, the more valuable the policy is
  • Premium Amount: the lower the premiums, the greater the cash settlement
  • Help supplement underfunded retirement accounts
 It’s important to know that life settlement proceeds are taxable and are governed by an IRS Ruling see (https://www.irs.gov/irb/2009-21_IRB/ar06.html.)
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If you are selling your policy, please make sure to contact a tax advisor.

Who is Eligible for a Life Settlement?

The basic qualification criteria are:
  • Age: 65 and older. Those younger than 65 can be considered if they are of declining health.
  • Policy Benefit Amount: Minimum $100,000
  • Policy Type: Whole life, universal life or convertible term life policy. Regular term life insurance policies generally do not qualify.
Meeting these criteria do not necessarily guarantee that you qualify. If you are interested, you should contact a life settlement broker to evaluate your case.

Alternatives to Life Settlement

Life settlements are not appropriate for everyone and every situation. Here are a number of alternatives to selling your policy:
Withdrawing Cash. If you have built up a cash value in your policy, you can generally dip into that and withdraw some portion of it. Note that, this will reduce your policy’s death benefit.
  1. Adjusting Premiums. If you own a universal life policy, you can often reduce your premiums by adjusting down your death benefit. Call your insurance agent to help evaluate this option.
  2. Taking out a Policy Loan. If you have built up a cash value, you can borrow from your policy to get liquidity. If structured properly, you may not have to ever pay it back while you are alive. Once you pass, the death benefit will be used to cover this loan. Make sure you do proper research and consult your insurance agent and financial advisor. This is a complex transaction and if not structured correctly, it can have negative ramifications.
  3. Surrendering/Cancelling Your Policy. You can always cancel your policy. If you have any cash value in the policy, you can withdraw it at this time. Note that if you do receive proceeds, it will be taxed.
If you are interested in learning more about the details of life settlements, check out Ovid’s Definitive Guide to Life Settlements.  Ovid Corp. is a life settlement exchange, where consumers can sell their life insurance policies through our auction platform to institutional investors. For more information about Ovid visit www.ovidlife.com.

Additional information on possibly selling your life insurance policy can be found at  the Life Settlement Association 

​Here you will find information on reasons to consider selling your life insurance policy:
  • The premiums are no longer affordable
  • The need to replace lost income in case of death of the insured no longer exists
  • The need for funds to pay estate taxes no longer applies
  • There is a need for resources to pay for health expenses and long term care
  • A term policy may be reaching the end of the coverage period
Funds are wanted/needed to improve your retirement lifestyle and alternatives other than selling your policy:
  • Keep your policy in force through a loan or use of the cash surrender value
  • Seek an accelerated death benefit, if available
  • Assign the policy as a gift or charitable contribution
  • Covert a term policy to permanent insurance
  • Reduce the death benefit with a lower face value and lesser premiums
  • Lapse or surrender your policy
Any financial dealings of this magnitude should be checked by your attorney and RetiredBrains makes no guaranteed as to the legitimacy of this or any firm or reference included on the Website..