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How Do Life Settlements Work?

Selling your life insurance policy can be a great option for some, so how do life settlements work?

how do life settlements work

Starting with the basics, in 1911 the U.S. Supreme Court passed a law that allowed the transfer of ownership of a life insurance policy to a 3rd party.  In other words, when you signed up as the owner of your life insurance policy, you were responsible for paying the premium all these years, but if you qualify you can now sell your policy to a 3rd party for a lump sum of cash providing liquidity now, and you no longer have to worry about paying the premiums anymore. 


The life settlement option is not as commonly known as it should be, and many people unfortunately let their policy lapse instead.  In the late 80s, life settlements became popular around the AIDS epidemic as people were given a short life expectancy and needed cash for medical bills.  As medicine for HIV improved, the life settlement marketplace quieted down until the senior market began having a need for life settlements as well, and so sometimes life settlements are referred to as senior settlements. 

A life insurance policy is considered personal property, and can be bought and sold just as a piece of real estate.  Some states are adopting laws to enforce the awareness of this option to seniors, and you're ahead of the game because you're already here researching it.  

In the life settlement space, there are life settlement providers and life settlement brokers.  Policy owners can try to sell their policy directly, and they may get a decent deal, but they have no way of knowing without having multiple investors bid on it.  Most often you're better off working with a life settlement broker who's going to prepare your case and shop it around to all the life settlement providers with the intent of creating a bidding war.  When investors know there's competition for a policy, their offer tends to increase quite a bit. 

In a life settlement, the 3rd party investor offers a lump sum of money valued greater than the cash surrender value of the policy and less than the death benefit.  If you choose to accept this offer, then the 3rd party takes over all remaining premium payments, and also becomes the beneficiary of the death benefit.  This creates liquidity for the insured, helping to collect some of the policy benefits without letting it lapse and surrender all value.  As you can imagine, an important part of the life settlement process is underwriting and the determination of your life expectancy.  The 3rd party investor needs to get a good idea of how many more premiums they will have to pay before they can collect the death benefit to help determine an offer that is fair for both parties.  

At Life Settlement Option, not only can we answer the question of how do life settlements work, but we can also represent you as a broker, help prepare your case for market, create competition, negotiate on your behalf, and have your best interests in mind.  Our mission is to find you the highest bidder for your policy, and recommend this method over going to just one investment firm.  

The process to sell a life insurance policy requires an initial qualification to make sure you're able to move forward.  Then we can begin the process of collecting information to help appraise your policy.  If you're ready to move forward, then we prepare it and bring it to market.  The process is a lot like selling a piece of real estate, and can take several months to close.  If you're beginning to think about it, we recommend at least starting the qualification process now.  That way when you are ready, then we can move forward quickly.  

To get started, send us an email with your case details, or schedule a phone consultation with our online calendar.  We look forward to reviewing your life settlement option soon.  

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