All about Life Settlements

All about Life Settlements

A life settlement is a process of selling the life insurance policy to a third party for lump sum cash payment.

The third party is usually an experienced institutional investor who is then responsible for paying the policy premiums and is completely entitled to the policy benefits. Upon the insurer’s death, the investor receives the death benefit.

This process of a life settlement is possible as a life insurance policy is treated just like any other asset.

A life settlement yields a higher cash payment when compared to the cash surrender value of the policy. The cash surrender value of the policy is the amount offered by the insurance provider to the policy owner upon cancellation of the insurance contract.

It all began in the early 1900’s. The United States Supreme Court gave a ground-breaking decision in Grigsby vs. Russell case. The court stated that a life insurance policy is a property just like any other. The policy owner has the right to liquidate the property according to his wishes.

Life settlements became common in the 1980’s as the AIDS and Cancer epidemics drove many young terminally ill policyholders to sell their insurance policies before their death.

Before the existence of the life settlement process, a policyholder had only two options:

  • He/she had to surrender the policy and receive the cash value.
  • He/she had to allow the insurance policy to lapse. This would forfeit the policy and make it worthless.
  • An insurance policy owner may choose for a life settlement option in usually three scenarios:
  • When he/she can no longer afford to pay policy premiums. That is, the policy premiums are affecting his/her finances negatively.
  • When he/she needs financial assistance to afford medical care and other related expenses. The policy might not cover these medical expenses.
  • When he/she no longer needs the policy benefit.

Most policyholders are unaware of the life settlement process. They are unaware that a life insurance policy can be sold to a third party for a one-time cash settlement.

A life insurance policy has three essential parts: premium, death benefit, and living benefits.

Premium is the amount of money that the policyholder must pay to keep the insurance policy alive. This payment can be made annually, monthly, or quarterly.

A death benefit is an amount received upon the death of the policyholder.

Living benefits are the insurance benefits that act as a source of cash to the policyholder while he/she is alive.

Life insurance with living benefits comes as a boon to policyholders who are facing financial issues.

In life insurance, the policyholder may receive all or a portion of death benefit before death.  If he/she is suffering from terminal illness or critical illness and has a financial crisis, then the person may opt to receive the living benefits. These benefits are also known as accelerated benefits.

Hope that this article gave you some knowledge about life settlements and the key points that have to be noted when involved in such a process.

Have a happy investing!