Life settlements are a powerful financial tool that many seniors don’t know about. It’s the sale of one’s life insurance to an investor (usually a large financial institution). A transaction would work like this: the insured will get an upfront cash payout from the investor. The ownership of the policy will be transferred to the buyer. The buyer will then take over paying the policy’s premiums. Finally, the policy’s benefit amount will be paid out to the investor when the insured passes away.
Life settlements are a way to monetize an asset you may not have known that you had. It can turn an unnecessary annual expense into a source of capital. Many seniors who sell their policy in a life settlement will use the money to pay for home care expenses or upgrade the quality of their retirement.
Although life settlements are not appropriate for everyone, we believe everyone should be aware of the option. In the United States, over 80% of life insurance policies are never paid out. Most policies end up being surrendered or canceled, meaning the insurance companies are profiting significantly off of consumers. Being aware of the option will at least allow consumers to make a well-informed decision if the need ever arises.
Why Would I Want to Sell My Policy?
You should consider a life settlement if your circumstances have changed enough that the policy is no longer fitting your needs. Many life insurance policies were purchased decades ago when the individual was still working and raising a family. At that time, the policy served to protect them in case of an unexpected passing. Years later, that purpose may no longer be relevant, or the insured’s financial situation may have changed. Here are the top 3 reasons for considering a life settlement:
(1) The premiums are not affordable.
There are two reason why annual premiums can become unaffordable. First, the financial situation of the insured may have changed. When the insured was earning a full-time salary, the premiums were not a problem, but now that the insured is living off of retirement income, the policy may no longer be as affordable. Second, in some policies, the premiums escalate as the insured ages. Cost of insurance increases over time and if the policy has not built up enough cash value or dividends to offset that, then the insured will have to make up for the difference through increased premium payments. This is particularly common in Universal Life policies.
(2) The family has a large expense to pay for.
Because life settlements can provide a large sum of capital, it can be used to help pay for a large upcoming expense. Some common examples include paying for uncovered medical expenses or funding an underfunded retirement plan. Others have used the money to fund a grandchild’s college tuition or improve their retirement living standard.
(3) The coverage is no longer necessary.
Most policies are purchased to protect our children. However, after many years, the kids are now full-grown, independent adults. In many cases, the safety net is no longer necessary. Additionally, if the policy’s beneficiary was the spouse, the spouse may have passed before the insured, rendering the policy’s coverage unnecessary.
Who Qualifies for a Life Settlement?
The basic qualification criteria are:
- The insured should be of the age 65 and older. Those younger than 65 can be considered if they have declining health.
- The life insurance policy’s death benefit is at least $100,000.
- The policy must be a whole life, universal life or convertible term life policy. Standard term life policies or premium financed policies are not eligible.
However, these criteria do not necessarily guarantee that your policy could be sold. You should contact a life settlement broker to have your policy evaluated. Most reputable brokers will do this free of charge, but will you to invest some time into the process.
How Much Money Could I Get For My Policy?
The average sale in the industry results in a cash settlement of approximately 20%-25% of the policy death benefit. So for example, if you had a $500,000 policy and your policy could be sold, you could receive on average $100,000 to $125,000. That being said, what you could get is entirely case dependent. Here are the factors will affect your offer:
- Policy Size: The larger the policy, the more you will receive.
- Age & Life Expectancy: The older the insured person is, the more valuable the policy is.
- Premium Amount: The lower the premiums, the greater the cash settlement.
Life settlements can be a great financial alternative for older Americans. This powerful retirement funding tool unlocks the value of your life insurance policy and can help you achieve a better financial outcome than simply surrendering or canceling your policy.
Ovid Corp. is the leading life settlement exchange, where consumers can sell their life insurance policies through our auction platform to institutional investors. For more information about Ovid please visit www.ovidlife.com or call 800-311-OVID.