If you’re interested in life settlements then you need to be aware of a lot of facts, the most important of which is if you qualify for life settlement and what it means for you in the future.
What Is Life Settlement?
If you have a life insurance policy and are still paying for it then you may still be able to sell the insurance policy to a third party. Of course, the policy must still be in force.
When you feel that the policy is not relevant or you can’t afford to pay the future premiums, it is possible to sell the policy. The third party will pay a lump sum for your policy, in lieu of your life settlement. They will then continue to pay the monthly life insurance contributions until your death.
However, at the time of your death the funds do not go to your estate. The third party will then have the legal right to collect it. The theory is that they will have paid less in monthly installments than they originally paid for the policy, thereby effectively creating a profit.
It should be noted that you must have a whole life, universal life, or convertible term life insurance policy. Don’t be confused. In reality, the majority of policies fall into this category.
The value of the life settlement offer you receive will depend on several criteria. Let’s discuss those in details.
Your Age & Health
The older you are the more likely it is you’ll get a reasonable settlement offer. The third party first needs to assess your health and life expectancy. They can then rate this against the cost of paying your installments until they receive a payout.
As mentioned, their profit comes from taking your life payout before they’ve paid this much in funds.
In short, the less time you have to live and the larger your policy, the more attractive it is to a third party.
The general guidelines are a minimum age of 65 with a policy of $50,000 or more. However, this doesn’t guarantee an offer will be made as life expectancy is rising. You’re more likely to be made an offer if you’re over 70.
Of course, you can also be accepted under 65 if you have serious health issues.
An example can help to understand the process:
- Your life insurance payments are $50 per month, that’s $600 per year.
- The value of your life insurance is $50,000.
- The third party investor offers you $30,000 for your life insurance policy.
- You’re 65 years old.
- At $600 per year, it will cost the third party $6,000 every 10 years. If you live to 95 then they’ll have paid out $18,000. Their profit will be $32,000, (50,000-18000). You’re likely to be accepted as even if you live to 115 it will still only have cost them $30,000, giving a $20,000 profit.
But, if your payments are double this, it will cost the third party $12,000 every 10 years, that’s $36,000 by the time you’re 95 and that amounts to much less profit.
Don’t’ Forget: If you have creditors they may want a piece of your life settlement. You must bear this in mind before you accept an offer.
The Cost Of Your Policy
As you can see, life expectancy is only part of the equation. The amount you currently pay every month is a critical part of the equation. This, alongside how long you live for, will govern the profit that a third party can make.
The higher your payment the greater the risk as well, unless you have an exceptionally high payout value. The third party will also need to verify whether the premium will stay the same or not. Convertible and universal policies can be subject to large increases in premiums as you age, making it a very unattractive deal for the third party investor.
The Insurance Firm
It should be noted that an insurance payout will only be made if the company is still in business. For these reasons, third-party investors will only usually make a life settlement offer if your policy is with one of the highest rated companies. This increases their chances of getting a successful payout.
You should also note that this approach to life settlement requires you to be a US citizen and resident. Other countries have their own rules and regulations surrounding life insurance and settlements.