For life insurance policyowners, the financial burden of maintaining a policy can often outweigh the future death benefits. Whether a policyowner is seeking immediate liquidity for medical or personal expenses, or wants to improve their retirement outlook, understanding what type of life insurance settlement options are available to them can help determine next steps.
Key Takeaways
- A traditional settlement is most beneficial for policyowners who no longer need a policy and need immediate liquidity or hope to contribute more to their retirement savings.
- A viatical settlement is an option best suited for those with chronic or terminal conditions in need of more immediate financial assistance.
- Retained death benefit settlements are best for policyowners who need financial flexibility now, but want to maintain a portion of their death benefit.
- Life settlements are an option for those who meet the following eligibility criteria:
- Age: 65 or older
- Health Status: Impaired health or terminal illness (in the case of viatical settlements)
- Type of Policy: Any policy type may qualify, including universal life, whole life, and term
- Death Benefit Value: A policy face value that exceeds $100,000
In this article
How Life Settlements Work
Life Insurance Settlement Options
Are You a Good Candidate for a Life Settlement?
What to Do with Your Life Settlement Payout
Key Takeaways
How Life Settlements Work
Once a policyowner decides they no longer want or can no longer afford their life insurance policy, they have the option to sell it to a third party–known as a licensed life settlement provider or broker. Life settlement providers are institutions that provide a more beneficial alternative to a lapse or surrender of an insurance policy.
In selling to a provider, the policyowner effectively transfers ownership of the policy and any future death benefits to the life settlement provider in exchange for an immediate lump-sum cash payment, or a combination of cash and coverage with no future premium obligations. The provider then assumes all future premium payments required to keep the policy in force, or active.
The eligibility of a policyowner and the amount they can receive depends on a number of factors, including the insured’s age and health, and the specifics of the policy. While there are no set rules on who qualifies for the different life insurance settlement options, candidates are generally 65 or older and hold a universal life, whole life, or term life insurance policy with a face value of over $100,000.
Life Insurance Settlement Options
When it comes to life insurance settlements, there are a few different names given to the process to differentiate options, but the premise behind each is identical––selling an unneeded policy to a third-party.
Traditional Life Settlement
A traditional life settlement is the most common “type” or category of life settlements, typically initiated by a policyowner aged 65 or over in relatively good health or with minor health impairments. Payment for the transaction can be in cash, or a combination of cash and coverage with no future premium payments.
Viatical Settlement
A viatical settlement is effectively the same as a life settlement, with the exception that “viatical settlements” is a term used in some states to signify that the insured is terminally or chronically ill. In some instances, the tax implications of a viatical settlement can be more favorable for policyowners than a life settlement. Viatical settlements also provide a higher payout in terms of percentage of death benefit than a traditional life settlement option due to the insured’s reduced life expectancy.
Retained Death Benefit
A Retained Death Benefit is a type of transaction where the licensed life settlement provider enables you to maintain life insurance coverage with no future premium payments required. It’s essentially “free” coverage––albeit the death benefit will be smaller than the original policy. This is an effective arrangement for policyowners who still want to maintain a death benefit for their loved ones in the future, but need relief now from the financial burden of monthly life insurance payments.
Retained Death Benefits can be received in both traditional life settlement transactions as well as viatical settlements. If this is a better fit for your needs, Coventry can assist you in securing this type of benefit.
Are You a Good Candidate for a Life Settlement?
To qualify for one of the settlement options for life insurance policies, the insured will typically need to be a minimum of about 65 years old, though younger insureds may qualify depending on health conditions. Regardless of age or health, however, the policy will need to be at least $100,000. Although the policy type doesn’t usually have a significant impact on eligibility, it can affect the payout percentage in some instances.
Examples of eligible candidates may include:
- An 85-year-old in good health who needs access to liquidity to convert a home for aging in place.
- A chronically-ill 50-year-old policyowner who needs to cover growing medical expenses.
- A 65-year-old with no dependents and who wants to increase retirement savings to live a more fulfilling life in retirement.
However, definitive eligibility would depend on each individual’s full policy and health profile.
Factors to Consider When Deciding Whether to Sell Your Life Insurance Policy
When reviewing your options for a life settlement, it’s important to consider both the financial and personal factors that can influence whether selling is the right choice.
- Financial needs vs. future obligations: A settlement can provide immediate cash for medical bills, debt, or retirement, but consider whether you still need coverage for your family and whether you can afford to keep paying premiums.
- Health, age, and life expectancy: Settlement offers are typically higher for older individuals or those with health conditions, since the buyer’s risk is lower. Younger and healthier policyholders may qualify for less.
- Policy type and size: Whole life and universal life policies often attract stronger offers than term policies, and larger face value policies tend to bring higher payouts.
- Premium costs: If ongoing premiums are difficult to maintain, settlement options might relieve that burden, but buyers factor those costs into their offer.
- Taxes and regulations: Settlement proceeds may be taxable, and state laws vary on how life settlements are handled. Review your policy contract for any restrictions.
- Alternative options: Compare settlement offers to your policy’s surrender value, borrowing against the cash value, or reducing the death benefit while eliminating premiums.
- Impact on beneficiaries: Selling transfers ownership and the death benefit to the buyer, so weigh how this decision affects your heirs and your legacy goals.
- Proceeds vs. costs: Understand what you’ll actually receive after broker fees, commissions, and other costs are deducted.
What to Do With Your Life Settlement Payout
Life settlement payment options usually take the form of cash, a retained death benefit, or a combination of the two. Policyowners can choose the method that best fits their financial needs, depending on the type of life settlement they pursue.
While every policyowner’s circumstances differ, there are a few common ways people utilize a life settlement payout. There are no requirements on what policyowners must use their payouts for, but they are most often used to cover medical care costs or long-term care. Life settlement payouts can also be used to pad retirement savings or improve financial security for the future.
For more information on the insurance settlement options that are available for your specific circumstances and life insurance policy, contact Coventry Direct.
FAQs About Life Insurance Settlements
What is the average life settlement amount?
While settlement amounts vary widely, many policyholders receive anywhere from 10% to 25% of the policy’s face value. The exact amount depends on your age, health, policy type, death benefit size, and the ongoing cost of premiums.
What are the disadvantages of a life settlement?
Selling your policy means your beneficiaries will no longer receive the death benefit. The proceeds may also be taxable, and you may receive less than the full value you’ve paid in premiums over time. Additionally, broker fees and commissions can reduce the net payout you receive.
How long does the life settlement process take?
The process typically takes a few weeks to a few months. It involves gathering policy information, underwriting to assess life expectancy, and securing offers from buyers.
Are life settlement proceeds taxable?
In many cases, yes. Depending on your cost basis in the policy and the amount you receive, some or all of the proceeds may be subject to taxation, depending on the settlement option you chose. A tax advisor can help you understand your specific situation.
What can I use the money from a life settlement for?
There are generally no restrictions. Many policyholders use settlement proceeds to pay for healthcare costs, long-term care, debt reduction, or to improve the quality of life in retirement.
