A life insurance settlement (commonly referred to as a life settlement, or more specifically what is usually known as a senior life settlement) is the term given to describe when an individual (usually someone in their 60’s, 70’s or 80’s) sells an existing life insurance policy they own to a third party — a person or an entity other than the company that issued the policy — for more than the policy’s cash surrender value, but less than the death benefit amount. Please note that a sub-class of life settlements are called viatical life settlements and this label typically refers to a life settlement transaction where the insured who is selling the policy is quite ill, with usually less than a 2-year life expectancy.
Most people who own a life insurance policy that they no longer want, need, or no longer can afford, generally think they only have 2 options: they can either surrender the policy for its cash surrender value (CSV), or allow the policy to lapse.
A life settlement presents a third, often more profitable choice to these insureds: They can sell their policy (and the associated right to receive the death benefit upon their passing) to an investor. The process of conducting such a sale is referred to as a life settlement, and the resulting investment that the buyer holds is also referred to a life settlement investment.
When an insured party no longer needs their insurance policy, they can sell it for a certain amount of cash to an investor, historically and usually an institutional investor. The insured person essentially transfers ownership of the policy to the investor. The insured party receives a cash payment in exchange for the policy — more than the surrender value, but less than the policy’s prescribed payout at death.
By selling it, the insured person transfers all aspects of the policy to the new owner. This means the investor who takes over the policy inherits and becomes responsible for everything related to the policy including premium payments along with having the right to the death benefit payout when the insured eventually passes away.
There are many reasons why people choose to sell their life insurance policies, and this is usually done when the insured person doesn’t have a known life-threatening illness. There are exceptions which fall under what is known as a viatical life settlement, but those are relatively uncommon compared to senior life settlements.
The majority of people who sell their policies in a life settlement tend to be older people who need money in retirement but haven’t been able to save up enough for it. By receiving a cash payout, the insured party can supplement their retirement income.
It is important to note that the senior citizens only do this when the need for money now outweighs the need or desire to pass money to someone else upon their passing. And often the person or people they originally were planning to leave the death benefit to are no longer in their lives, either due to divorce, or perhaps due to their beneficiary predeceasing them.
Other reasons for a senior choosing to sell their policy include the inability for the insured to afford the premiums, emergency situations, cases involving key individual insurance policies held by companies on executives and changes to the estate tax laws and limits.
