What is a Life Insurance Settlement?
What is a Life Insurance Settlement?
Have a life insurance policy? Do you not want said policy? There are some obvious solutions, besides death, such as letting it term out or lapse due to lack of payment.These are all viable solutions, but wouldn't you rather have an option to dispose of your policy in a way that financially benefited you, instead of losing everything you had already put into it?This is where the settlement comes into play. A life insurance settlement is what occurs when the owner of a policy sells the policy to someone else. The policy no longer belongs to the original owner (is no longer responsible, nor will benefit from it) and in exchange receives a lump sum from the purchaser.If you need cash quickly, this would be a great option. Most life insurance policies do not benefit the policy owner financially until they die and the policy pays out a death benefit. A settlement is an accepted practice for someone who is in need of funds.We know why people would sell, but who would buy a policy? The truth is, anyone can buy a life insurance settlement. When purchasing life insurance, you must have an actual interest in the person who is being insured. You can't take out an insurance policy on just ANYONE, but you can purchase any policy from an owner.However, most buyers of settlements are financial companies. When the policy has a new owner, that new owner could make him or herself the new beneficiary of the policy. When the insured passes away, the new owner receives the death benefit.Sounds easy enough... right? Wrong. Next is a numbers game. When selling or buying a settlement you will have to determine how much the policy is worth. The sale price for a policy is usually about 75% of the face amount (or benefit amount), but it also relies greatly on the current market. The anticipated lifespan of the insured is a factor when figuring out the value of a settlement. Why is this? The new owner of the policy is responsible for keeping the policy in force. The longer the insured is alive, understandably the more premiums the purchaser of the settlement will have to pay to maintain the policy. Failing to pay policy premiums would result in a policy lapse, and thus no longer have a death benefit coverage.Settlements typically pertain to permanent life insurance policies and are often sold once someone is of an advanced age or is terminally ill.
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