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Life Settlements: Cash for Your Life Insurance Policy
- April 14th, 2016
Are you having difficulty keeping up premium payments on a life insurance policy, or do you no longer need the policy? Policyholders once had only two options: let the policy lapse or turn it in for a meager cash surrender value. Now there's another, often vastly more lucrative alternative: sell the policy to a life settlement company.
Such companies, which have sprung up only in the last several years, buy insurance policies -- term, whole life, universal and other types -- from seniors, pay the premiums, and collect the death benefit when the policyholder dies. Payments are usually significantly more than a policy's trade-in value (but less than the death benefit, of course).
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Attorney Samantha Simmons Fredieu is an associate at Hale Ball. Ms. Fredieu graduated magna cum laude from Vermont Law School where she was the symposium editor on the Vermont Law Review, a production editor on the Vermont Journal of Environmental Law, and a member of the Moot Court Advisory Board. She has clerked for...
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Ron M. Landsman has been practicing elder law since 1983, before it was known as elder law, originally with Landsman and Laster, Washington, D.C., then Landsman, Eakes and Laster, also in Arlington, VA, and since 1990 in his own practice in Montgomery County, Maryland. He has been among the most active members of the...
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Loretta Morris Williams is a certified elder law attorney by the National Elder Law Foundation. Ms. Williams was admitted to the Council of Advanced Practitioners, National Academy of Elder Law Attorneys (NAELA) in 2012. She serves as President of the Virginia Academy of Elder Law Attorneys. Ms. Willia...
To give one example, a policy with $1.25 million in coverage and a $190,000 cash surrender value was sold to a life settlement company for $415,000.
Life settlements are different from viatical settlements, in which a settlement provider purchases policies from policyholders who are terminally ill. Life settlement companies typically buy policies from people over age 65 who have had a downturn in their health, but who are not terminally ill, and who own a policy with a face value of at least $100,000 to $250,000, depending on the company.
Life settlement companies are typically licensed by the state insurance department, although not all states require a license. The industry leader is Coventry First of Fort Washington, Pa., which has 40 percent of the market share and has purchased more than $1 billion in life insurance. Or, your financial advisor may send your policy to a broker, such as Windsor Life Settlements, which will shop the policy around to various life settlement purchasers to get the best deal. The potential market for life settlements has been estimated to be as large as $134 billion. See related article, "New York Sues Life Settlement Company for Influencing Brokers."
There are some downsides to such transactions, however. For one, some or all of the proceeds may be taxable. In addition, the beneficiaries of your policy may not be pleased with the sale, which is why some life settlement companies require beneficiaries to sign off on the transaction.
Selling a policy may not necessarily be a good deal for the policyholder, depending on the circumstances. According to one estimate, there's a 90 percent chance that a policyholder would do better financially by holding onto the policy than selling it.
Still, the vast majority of life insurance policies either lapse or are surrendered before a death claim is paid. For those who can't afford premiums or no longer need a policy, selling to a life settlement company can be a great option.
For answers to frequently asked questions about life settlements, go to: http://www.windsorlifesettlements.com/what-is-a-life-settlement/ and the life settlement broker Ovid offers "The Definitive Guide to Life Settlements."
Last Modified: 04/14/2016