Life Insurance Settlement Options

Published July 18, 2022

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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, a life settlement can offer financial relief for those who need it.

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 can 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 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 life settlements, candidates are generally 65 or older, and hold a universal life, whole life or term 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 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 a life settlement, 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.

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.

Key Takeaways

While life settlements are not a one-size-fits-all arrangement, and may not be right for everyone, there are many options available that can fit a range of needs, both financially and in regards to a policy owner’s health.

  • A traditional settlement may be beneficial for policyowners who no longer need a policy and hope to contribute more to their retirement savings or improve their financial outlook.
  • Viatical settlements, on the other hand, are better suited for those with chronic or terminal conditions in need of more immediate financial assistance.
  • Retained death benefit settlements offer financial flexibility to policyowners who need it now while still allowing them to maintain a portion of their death benefit.

Since certain circumstances can impact a policyowner’s eligibility to pursue a life settlement, remember to review the following factors carefully to determine whether moving forward with a life settlement is possible for you:

  • Age: Typically, only those aged 65 or over are eligible for life settlements.
  • Health Status: Life settlements provide higher payout for those who have impaired health or a terminal illness.
  • 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 is usually needed to generate interest from providers.

For more information on life insurance settlements and what options are available for your specific circumstances, contact Coventry Direct.

Editorial Disclaimer: Coventry Direct, a member of the Coventry group of companies, educates policyowners and insureds interested in learning about life settlements. Resources and publications are researched, written and updated by in-house experts to reflect the most up-to-date industry knowledge.

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