What is a life settlement?

A life settlement transfers an existing insurance policy to a third party in exchange for a one-time cash payout. The amount paid is less than the death benefit but more significant than the surrender value. Following the sale, the buyer takes over as the policy’s beneficiary and is responsible for paying its premiums. When the insured person passes away, they are credited with the death benefit.

How Settlements of Life Operate

An insured party may sell their insurance policy to an institutional investor for a set sum when they cannot continue paying for it. For the majority of insurance holders, the cash payout is primarily tax-free. In essence, the insured gives the investor ownership of the policy. As mentioned, the insured party exchanges the policy for cash, which is greater than the surrender value but less than the death benefit specified in the policy.

The insured transfers all life insurance policy ownership to the new owner when they sell it. This implies that the investor who assumes ownership of the policy inherits it and is now accountable for all policy-related expenses, including premium and death benefit payments. The new owner, who becomes the beneficiary following the transfer, is thus entitled to the payout upon the insured person’s death.

Reasons to Select a Life Settlement

Life insurance policy sales can be made for various reasons, and they often occur only in situations where the insured individual does not have a recognized life-threatening condition. Most policyholders who sell their policies for a life settlement are typically elderly individuals who haven’t been able to save enough money for retirement. For this reason, senior settlements are another name for life settlements. The insured party can augment their retirement income with a mainly tax-free payout by accepting a cash settlement.

Here are some more justifications for selecting a life settlement:

• They are not able to pay premiums. An insured individual may sell the policy using a life settlement as an alternative to allowing it to lapse and be terminated. Depending on the terms, the insured may receive no money or a lesser cash surrender value if the premiums are not paid. With the current policy, however, the investor typically receives a more significant cash payout in the event of a life settlement.
• The need for the policy has passed. The reasons for having the policy may eventually run out of steam. It’s possible that the insured party’s dependents no longer require the coverage.
• Instances of crises. If an unforeseen circumstance emerges, such as a family member’s illness or death, the policy owner might have to sell the insurance for cash to pay for these costs.
• Cases involving important individual insurance policies that CEOs’ employers have. This is standard procedure for those who have left the company. The corporation can cash out on previously illiquid insurance by accepting a life settlement.

Viatical Settlements versus Life Settlements

Sales of policies took off in the 1980s as AIDS-affected individuals acquired unnecessary life insurance. This gave rise to a different sector of the market: the virtual settlement market, in which individuals with terminal illnesses exchange their policies for cash. As patients with AIDS started to live longer, this segment of the industry lost its appeal.

Someone may sell their life insurance to another person if they have a terminal illness and a limited amount of time left to live. The buyer becomes the new policy owner by accepting the premium payments in exchange for a sizable lump sum. The new owner pays the death benefit upon the insured party’s passing.

Because the investor is essentially betting on the insured’s death, volatile settlements are typically riskier. It is impossible to predict when the original policy owner will pass away, even if they may be ill. The coverage gets less expensive the longer the covered individual lives, but when premium payments are taken into account over time, the real return decreases.

Particular Points to Remember

In essence, life settlements establish a secondary market for life insurance products. Years have passed while this secondary market has developed. The 1911 Grigsby v. Russell case, which the United States Supreme Court decided, is the most notable court decision that validated the market.

John Burchard sold his life insurance policy to A. H. Grigsby, his doctor, because he could not make the premium payments. Following Burchard’s passing, Grigsby attempted to obtain the death benefit. To obtain the money, the executor of Burchard’s estate successfully sued Grigsby. However, the matter reached the Supreme Court.

In his decision, Justice Oliver Wendell Holmes of the Supreme Court compared life insurance to ordinary property. He believed that the policy had the same legal standing as other assets like stocks and bonds and that the owner could transfer it at any time.

Furthermore, he stated that, as a piece of property, life insurance carries the following rights:

• Unless the insurer puts restrictions in place, the owner may designate a different beneficiary.
• The policy could be pledged as security for a loan.
• Owners may take out loans secured by their insurance policy.
• One can sell policies to another individual or organization.

A broker for life settlements represents who?

A life settlement broker can have a fiduciary duty to represent the policy owner. The broker’s responsibility is to locate the policy’s highest bidder.

Which Options for Life Insurance Settlements Ensure Payments?

An annuity with guaranteed payments until the policyholders’ deaths can be designed from a life settlement.

A Single Life Settlement Option: What Is It?

Any agreed-upon payments in a single-life settlement will end when the annuitant or beneficiary dies. On the other hand, if the annuitant survives, the joint life settlement will pay out until the annuitant’s spouse also passes away.

Conclusion

• A life settlement is selling an existing insurance policy to a third party for a lump sum of cash.
• When the insured dies, the policy’s purchaser becomes its beneficiary, assumes payment of the policy’s premiums, and receives the death benefit.
• People pick life settlements for various reasons, including retirement, prohibitive premiums, and crises.
• Viaticals are similar to life insurance policies.
• Life settlements do not constitute stranger-owned life insurance (STOLI) because they include a transfer by the policy owner.