A life settlement is the selling off of one’s life insurance policy to another person such that the buyer becomes the beneficiary of the death benefit of the policy. A life settlement is usually sold for a one-time cash payment. The payment is usually more than the face value at the time the sale was made but less than the death benefit to be received.

Understanding life settlement

If the insured decides to forfeit their life insurance policy for any reason apart from terminal diseases,in order not to lose their already paid premium, they may decide to sell it to a third party for an agreed price, as already noted above, higher than the value at the point of sale but lower than the actual death benefit.

By doing so, the ownership of the policy is automatically transferred to the buyer, naming him the beneficiary of the policy. What this means is that the policy buyer continues to pay the premiums on the policy until the death of the insured and then receives the death benefit as the beneficiary.

Most times, the cash payment is usually free of tax.

Life settlement

Reasons one may choose a life settlement

Selling one’s life insurance is doable if the insured has no known life-threatening illness. One can decide to choose life settlement for many reasons some of which include:

  • They may be old and want to retire but do not have enough savings to do so. So they sell their life insurance to supplement savings with a tax-free income.
  • They may no longer have a need for the policy. People who do not have any need to leave the benefits of the insurance to those who were their dependants at the time of the policy purchase may decide to sell off the policy in exchange for cash
  • If one becomes unable to pay their premiums, instead of losing the insurance or getting paid less than the surrender value, one may decide to opt for a life settlement. Choosing life settlement instead, guarantees they get paid more than the surrender value and they do not lose the benefits of the policy entirely.
  • In situations where the company where the insured works, is responsible for the policy of the insured, they may decide to sell off the policy should the insured resign or get terminated.

Relationship between life settlement and viatical settlement

In the 1980s the reselling of one’s life insurance policy was on the increase because people with terminal diseases such as HIV thought they would die and they decided they no longer needed their life insurance policy so they sold it for cash.

Through time the health sector has evolved such that they have been able to produce drugs that help people with such terminal diseases to live longer causing loss to that part of the insurance sector.

The idea of selling your policy because of a terminal illness is called a viatical settlement. After the sale of the policy, the buyer takes ownership of the policy and also pays its premium until the death of the insured when the new owner then receives the death benefit.

Unlike a viatical settlement, you do not have to be ill to sell your policy with a life settlement. 

As much as there are benefits to buying off insurance, there are setbacks involved. Since one can’t really tell how long the lifespan of the insured is, which sometimes may be longer than the third party buyer, the buyer may not live long to enjoy the proceeds from the investment.

Life insurance settlement broker

Abacus life settlement

Abacus Life

also read: Trust-owned life insurance

Life settlement broker

A life settlement broker’s job is to connect the highest bidder of the policy to the insured. The life insurance broker speaks for the insured and only works towards the interest of the insured.