A life settlement can be a valuable financial strategy for seniors with an unneeded or obsolete life insurance policy. By selling your policy to a third party, you can access funds for health care, retirement or other financial needs.
So, how does life settlement work and how do you get started?
In this guide, we’ll walk you through the life settlement process step by step, helping you determine if you qualify and how to maximize the benefits of a life settlement transaction.
1. DISCOVER IF YOU QUALIFY FOR A LIFE SETTLEMENT
Before you can sell your life insurance policy, you need to find out if you qualify for a life settlement contract. Not all individuals or policies qualify or are a good fit for life settlements.
There are two categories to consider when determining your life settlement eligibility:
- Your personal eligibility
- The eligibility of your life insurance policy
Personal Eligibility
Details on your age and health can affect your eligibility for a life settlement. Most settlement buyers prefer policyholders who are at least 65 years or older. Some buyers may accept policies from those younger than 65 with a terminal health condition, but this may require a special type of transaction.
Your current health status can also play a role in your eligibility for a life settlement. Someone with declining health or serious medical conditions often receives higher settlement offers because the policy’s death benefit is likely to be paid out sooner.
Policy Eligibility
In addition to personal eligibility, your life insurance policy must meet certain standards to qualify for settlement. These conditions include:
- Policy type: Permanent life insurance policies like whole life or universal life policies are the most commonly accepted types for life settlements. Convertible term life insurance policies may also qualify.
- Death benefit: The death benefit of your policy must be at least $100,000.
- Premiums: Most life settlement buyers require the policy’s premiums to be less than 5% of the policy’s face value.
- Issue date: Policies generally need to be in force for at least 25 months to qualify for a life settlement, though this requirement varies by state.
- Policy ownership: Depending on the situation, policies held by individuals, foundations, corporations, nonprofits or trusts may qualify for a life settlement.
2. FINDING A LIFE SETTLEMENT COMPANY
The goal of selling your life insurance policy is to maximize the funds you receive in the sale. This is where finding the right life settlement company can make a big difference.
You’ll have two options when looking for a settlement company: a life settlement broker or a life settlement provider.
Life Settlement Broker vs. Provider
A life settlement broker acts as an intermediary between you and potential buyers. Their main responsibility is to shop your policy around to multiple settlement providers using their network and expertise.
Brokers work as your advocate during the life settlement process to help you secure the highest possible offer for your policy. Brokers generally take a small percentage of your sale as a commission for their work.
Life settlement providers, on the other hand, are direct buyers of insurance policies. Choosing to sell to a provider can make the negotiation process faster, but it can also lower the value of offers you receive.
How to Choose a Settlement Company
The key to maximizing your life settlement transaction is to work with a trusted settlement company that has the experience to help you navigate the life settlement process. Things to look for in your settlement company include:
- They want to help you understand the process.
- The company offers free consultations.
- Policies and commissions are clear and transparent.
3. COMPLETE YOUR LIFE SETTLEMENT APPLICATION
You’ve determined your policy qualifies for life settlement — now what?
Your next step is to fill out a life settlement application through your settlement broker or provider. Applications are generally straightforward, but you’ll likely need to answer a variety of questions and submit certain documents, including:
- Copy of your policy
- The most recent annual statement
- Policy illustration
- Copy of the trust (if the policy is owned by a trust)
- Detailed medical history and list of prescriptions
- Contact information for physicians
- Family history
- Lifestyle information
A settlement broker or financial advisor can often help you fill out your application to make the process easier.
After Submitting Your Application
Once you submit your settlement application, it goes into a review process to determine eligibility for the life settlement market. Many life settlement companies use independent third-party underwriters to carefully review your complete medical file to determine the insured’s life expectancy. The value of a life insurance policy is determined by the life expectancy, multiplied by the annual premiums. Using a third-party underwriter helps ensure accuracy in the application review process.
4. RECEIVE OFFERS FOR YOUR POLICY
Accepted life settlement applications are placed on the settlement market, and you’ll start receiving offers. Settlement buyers will look at your application and policy to make an offer based on the information provided. Your life settlement offer is the amount a buyer is willing to pay for your policy.
As the policyholder, you’ll have the chance to either accept or reject each offer. Be sure to carefully compare offers before accepting one. Some considerations to make when comparing offers include:
- Offer amount: The cash value of the offer
- Net proceeds: How much cash you’ll receive after deducting any fees
- Payment structure: How the offer is paid out, usually as a lump sum payment
- Contingencies: Any specific conditions or requirements that must be met before payout
5. SELL YOUR POLICY
The final step in the life settlement process is to accept an offer and sell your policy. The buyer will send you a closing packet with forms for you to complete and sign. Documents in this packet might include a life settlement contract, insurance verification and a change of ownership form.
After sending back your signed documents, you’ll receive your life settlement payment. You no longer have to worry about your policy and can use your funds as you see fit.
LSA IS HERE TO HELP YOU NAVIGATE THE LIFE SETTLEMENT PROCESS
Selling your life insurance can transform an unnecessary policy into significant financial value. The funds from your settlement contract can provide flexibility to help you meet ongoing financial needs. By understanding each step — from assessing eligibility to finalizing the sale — you can make informed decisions that align with your financial goals.
Your first step in the life settlement process is to find out if you qualify and find a trusted life settlement company. At Life Settlement Advisors, we know how daunting the process of selling your policy can be. Our team is here to help you better understand if a life settlement is right for you. Contact us today to learn more about the settlement process and find out if your policy qualifies.
