When seniors with life insurance policies who are heading into retirement or who are already retired realize that they have poor financial prospects, the first thought that comes to mind is one of despair. It’s the thought of being forced to sell something near and dear to them, such as a home that they’ve lived in for most of their lives, property that they want to retire to or assets that they wanted to pass down to their children or grandchildren. Unexpected medical expenses might be taking a toll on retirement accounts and making the years meant for relaxation into years of worry and limited possibilities.
In such cases, many seniors decide to let their life insurance policies lapse or opt for a cash surrender offer from the company they bought the policy from. Many have no idea that life settlements are an option and, in fact, one that can be much more lucrative than surrendering the policy. Life settlements can be a great way to give a boost to your retirement fund, helping you to cover the costs of a home, medical expenses, retirement experiences, or creating a foundation for financial stability and safety for your children. The United States Senate Special Committee on Aging conducted a study in 2009 which concluded that life settlements yield eight times more on average than the cash surrender value for policies offered by life insurance companies. Yet many seniors still don’t know that life settlements are a possibility.
Concerns About Life Settlements
There are a few worries or concerns that some people have when considering a lifetime settlement. Most of these concerns have to do with commissions, privacy, and the idea of profiting from death. Let’s go through each of those.
Firstly, people are worried about what kind of commissions would be taken out of the lifetime settlements paid out to them. This was an issue at the beginning of the lifetime settlements industry when unethical brokers took advantage of seniors in difficult and desperate situations and took commissions of up to 50% of the total life settlement. Some didn’t even disclose this fact to their customers. Industry regulations have come far since those times, with lawmakers placing a limit of a 30% commission on lifetime settlements and requiring brokers to disclose the amount they take in advance. Reputable, established companies have no interest in taking advantage of their customers in such ways and hurting their reputation and profits in the long term, so be sure to shop around and compare rates – every legitimate broker will provide these to you as the first step in the process of selling a life insurance policy.
This is understandably an uncomfortable thought, but you can view it as a mutually beneficial transaction. The seller profits immediately by receiving a cash payment that will be, on average, larger than the policy surrender option offered by the insurance company, and the buyer – nowadays, usually a large financial investment fund – will profit later. Lifetime settlements are not dissimilar to annuities, widespread financial instruments from which the sellers stand to gain upon the passing of an individual.
Finally, there have never been any cases of foul play reported in connection to lifetime settlements. If that is a worry or you’re concerned about a single person profiting from your death, you shouldn’t sell to a private individual, but rather instead to licensed life settlement providers, which typically buy lifetime settlements as a part of larger financial investment package, in this way mitigating their own risk.
Worth of a Life Settlement
This is a question on every prospective seller’s mind. How much would a life insurance policy be worth? What are the number?
Often a life settlement is worth 20% or more of the death benefit of a life insurance policy. Therefore, if your death benefit is $100,000, you’d be able to get over $20,000 for your life insurance policy.
For individuals that are experiencing significant health issues this amount can increase to over 80% of the death benefit. On a life insurance policy with a $100,000 death benefit this would net the policy owner $80,000.
The method used to calculate the value is called a discounted cash flow analysis, with the seller’s life expectancy playing a critical role in the potential value of the life insurance policy. If you’re interested in selling your life insurance policy, you should go over the numbers carefully with a reputable broker or a financial advisor and ask them about the life expectancy underwriter services they use. The difference between a life expectancy of 10 more years and one of 13 more years, for example, can mean the difference between a sellable life insurance policy and an unsellable one. The lower the seller’s life expectancy, the more valuable the life insurance policy and the more the seller can get for it.