What Is A Life Settlement?

Essentially, a life settlement involves a financial transaction that is generally considered as a substitute for cash. It is also a contractual arrangement. The buyer, on the other hand, is generally an insurance company that is looking for new business in the face of lower premiums because of new regulations on risk based pricing. Life settlement seller is generally a third-party investor who needs money to repay a loan.

What is a life settlement without an insurance policy?

Life settlements are actually used for the sale of any kind of insurance products to a third party. For example, an individual or an entity may wish to sell a life insurance policy, irrespective of the insurance company or company product.

How do they work?

There are two distinct types of life settlements: Sale of whole life policies that pay out the death benefit, “Take-as-you-earn” policies that pay a steady stream of premiums to the buyer. Full-life insurance, such as whole life, annuities and variable universal life, usually pays the death benefit, while a take-as-you-earn policy pays a premium until the policy owner passes away. One of the most popular uses for life settlements is to sell a whole life policy to cover an existing debt. Suppose you owe $5 million to Wells Fargo and your term loan interest is $50,000 a month. The policy allows you to sell the policy to Wells Fargo for $5 million.

Why are life settlements important?

Having a life settlement protects the policy owner’s family from the probate process and the tax burden. For the life insurance company, this is also a good option because the proceeds are more than the surrender value and there is less administration to do.

How Is a Life Settlement Sold?

The process is highly regulated by state law. There is an application process to evaluate the risk involved and then it is registered. Once registered, the vendor is notified of interested buyers. It then goes through the process of selling the policy to the highest bidder. The buyer pays a premium, then settles on the actual purchase price. A portion of the premium is used to pay for the cost of the policy, including death benefit. After the policy is sold, the buyer becomes the policy owner.

What are the limitations of life settlements?

Every death is a financial event. As such, a death settlement could pose a risk to the purchasers and beneficiaries. The risk is that when the insureds die, there is a decline in the value of the life insurance policy. This means that there may not be sufficient funds to pay the beneficiary all the premiums if that owner were to die prematurely. On the other hand, a policy with a large premium paid up, with a death benefit in excess of the premiums, is likely to be more valuable to the insured, and its assets may be more liquid, which could reduce the risk to purchasers.

Summary

Although there is a lot of controversy surrounding this topic, there are a lot of positives to consider when considering it for your individual needs. Even though the amount of cash one receives varies by age, insurance industry, and policy, it’s something worth exploring as it’s a possibility that may become a reality for you or a loved one at some point.

About Shahbaz Ahmed

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