As of 2022, there was essentially a 50/50 divide between American adults who own some form of life insurance policy and those who don’t. Even with only half of the country owning life insurance, though, an incredible $200 billion worth of policies are lapsed or surrendered every single year. Among universal life policies specifically, 88% wind up lapsed or surrendered. This means even though a certain amount of policy premiums have been paid, the original policy’s beneficiary ultimately receives no death benefit whatsoever.
Simply put, that’s not how life insurance is supposed to work!
Yet, not everyone who purchases life insurance decides to stick with it, especially as their circumstances change. There are many reasons why someone might no longer need or want their policy, despite the fact that they’ve been paying premiums on it for years, if not decades.
- It could be that they simply can’t afford to keep paying the premiums, for example, but that’s only one possible reason.
- Policyholders may encounter unexpected expenses, whether medical bills are piling up or they have to begin exploring solutions for long-term care.
- Or, maybe it’s less about a need for the funds, and more about affording experiences and building memories—funding a big family trip, for example.
This article is going to take a deep dive into life settlements and life settlement companies. Whether you’re an individual policyholder exploring your options or a life settlement broker or advisor looking to better understand your clients’ questions and concerns, keep reading. We’ll address key topics about working with a life settlement company or broker, like:
- How life settlements benefit policyholders who no longer want or need their life insurance policy.
- What types of policyholders and policies qualify for life settlements.
- How the life settlement process works, including how long you can expect it to take.
- How much you might be able to receive in a life settlement.
By the end of this article, you’ll have the information you need to make an informed decision and—if you qualify and would benefit from a life settlement—how to get the process started with Life Settlement Advisors.
What Are the Benefits of Life Settlements?
The primary benefit of a life settlement is that it enables a policyholder to convert a life insurance policy into a one-time payout, as opposed to letting it lapse or surrendering coverage. There are many compelling reasons why a policyholder might consider a life settlement, with some of the most common being:
- It means you can stop paying premiums. If your budget is feeling strained or unsustainable, selling your policy to a life settlement company can provide some immediate relief because you’ll no longer have to pay your policy premiums.
- It’s better than letting a life insurance policy lapse. A life settlement is much more beneficial than simply allowing an unwanted or unneeded policy to lapse. If you stop paying your premiums and exceed the grace period for missed payments, it just lapses. When that happens, coverage ends and the potential death benefit will no longer apply. In other words, letting a policy lapse recoups no value.
- It also beats surrendering an unwanted or unneeded policy. While the cash surrender value of a policy may be considerably less than you might expect or want, taking the formal step of canceling your policy at least results in some returned value. A policy’s surrender value is the difference between the policy’s cash value and any surrender fees that are applied. Typically, the life settlement amount is 4-7 times the policy’s surrender value. Similar to a lapsed policy, the holder of a surrendered policy stops paying premiums and forfeits the policy’s death benefit.
- It pays a one-time, lump sum you can use as you see fit. Whether you intend to use your life settlement payout for medical bills, unexpected expenses, or even to fund a trip or vacation, the money you receive is yours to spend how you want. In some cases, you can also opt to sell only part of a policy in order to maintain some coverage while also receiving a modest payout. This also converts a fixed asset (your existing policy) into a more accessible, liquid value (a lump sum).
What Are the Disadvantages of a Life Settlement? Are There Any?
While life settlements are typically beneficial to policyholders—especially as an alternative to surrendering the policy or letting it lapse, options that leave value on the table—there could be drawbacks in certain scenarios.
The biggest potential drawback, by a considerable margin, is that when you sell your policy, your designated beneficiaries no longer stand to receive the death benefit in the event of your passing. Instead, the life settlement purchaser takes over paying the premiums and then collects the death benefit. In some cases, when you sell your life insurance policy, you also might lose eligibility for Medicaid and/or incur taxes on the additional income that comes with this transaction.
What Are the Potential Tax Implications of a Life Settlement?
As we’ve noted previously in our guide to selling a life insurance policy, “you must pay taxes on any amount you receive that exceeds the amount of the seller’s basis (or what you paid in premiums).” That’s why it’s always important to discuss these matters with a trusted financial advisor before making any big decisions.
By way of example, though, let’s say you’re looking to sell your policy today, and you’ve paid $30,000 in premiums to date. If that policy were to net you a $40,000 life settlement, you can expect to be taxed on the $10,000 difference between those figures.
What Is the Commission of a Life Settlement?
In exchange for the advocacy and related services of a life settlement broker, the policyholder will likely be subject to paying a commission out of the lump sum. In these situations, the broker’s role is to understand your situation, present your best options, and make sure you’re getting the best outcome possible. Brokers’ commissions can vary and are usually calculated as a set percentage (as high as 30%) of the total price the policy ultimately sells for.
Who Qualifies for a Life Settlement?
Several factors determine whether or not an individual qualifies for a life settlement, including their age, policy type, death benefit, and more. Here’s a quick overview or the most important considerations to think through as you begin researching life settlement companies:
- Policyholder’s Age | The ideal candidate is a male or female in their mid-70’s or older that has had a change in health since the policy was issued. An exception to this guideline would be a male or female in their 60’s to early 70’s that has multiple chronic medical conditions and a significant health change has taken place since the policy was issued. For an insured to qualify, their life expectancy must be 15 years of less.
- Policy Type | Generally speaking, the following policy types are eligible for life settlements:
- Term Life
- Convertible Term Life
- Survivorship Universal Life
- Survivorship Whole Life
- Whole Life
- Universal Life
- Variable Universal Life
- Indexed Universal Life
- Life Expectancy | The policyholder must have a life expectancy of 15 years or less.
- Death Benefit | To qualify for a life settlement, a policy’s death benefit must be $100,000 or more.
- Premiums Paid | The annual premium will typically need to equal less than 5% of the policy’s face value.
- Date Issued | To qualify for a life settlement, a policy will need to have been in active standing for at least 25 months—though some states may have their own requirements.
- Ownership Type | Individual-owned life insurance policies are eligible for life settlements, as well as those held by corporate entities, businesses, foundations, non-profit organizations, and trusts.
For more information, you can use our handy life settlement calculator to see if you’re eligible.
How Does a Life Settlement Work?
Primarily a one-time transaction between a policyholder and a life settlement provider, the life settlement process is probably less complicated than you think. For the policyholder, it means converting an unwanted or unneeded policy into a lump sum payment. The life settlement provider becomes the “purchaser” and assumes ownership of the policy. The company takes over paying the policy’s premiums, becomes the beneficiary, and ultimately receives the death benefit.
Here’s an overview of how this process works:
1. See if you qualify for a life settlement. The first step is to determine whether the life insurance policy you hold is eligible for a life settlement. You can use the Qualification Calculator on our website to take this first step. We’ll ask a few questions about things like your age and health, the policy type and its cash surrender value, policy loans, the annual premiums you’ve paid, and the policy’s death benefit.
2. Fill out a life settlement application. Once you’ve determined eligibility, the next step is to complete an application. You can download our application here, which you’ll need to complete with details, including:
- Your insurance carrier
- Your policy’s face amount and/or death benefit
- The policy type and date issued
- The policy’s accumulated value and cash surrender value
- Premium amounts (and frequency)
3. Wait for your application to be processed and reviewed. During this time, the life settlement company will review the details of your application, including policy specifics and medical information records. These processes are meant to ensure eligibility and help policyholders recoup as much value as possible from an unwanted or unneeded policy. Our team at Life Settlement Advisors works with independent, third-party underwriters to evaluate your application and ultimately determine whether you meet the criteria to enter the life settlement market.
Assuming the application is complete and qualifies for a payout, the life settlement company will contact multiple potential buyers (investors) in order to secure one or more “bids” for the policy. At this stage, the life settlement company will be able to help you understand the different offers, and will work with you to determine the best offer on the table.
4. Receive one or more life settlement offers to review. If you qualify (based on the information you provide in your application), you’ll receive one or more life settlement offers. In addition to reviewing the lump sum settlement amount for each, it’s wise to speak with a financial advisor to understand if there will be any other implications for selling off your unwanted or unneeded policy.
For example, what will your options be if you later decide you do want or need an active life insurance policy? In cases where you’re not entirely certain you want to trade your whole policy for a settlement payout, you may also be able to sell part of your policy.
And what will your survivors receive when you pass? Since the life settlement purchaser takes over not only the premiums but the death benefit as well, it’s vital that you consider the impact accepting an offer might have on your immediate family.
5. Review—and accept—the offer. Once you’ve had an opportunity to review the life settlement contract offer and ask any questions you may have, you can either accept or decline the offer. If you accept, then the process of converting your unwanted or unneeded policy will occur.
How Long Does It Take to Get a Life Insurance Payout in the Form of a Settlement?
From start to finish, it usually takes 90 days for a policyholder to receive their life settlement payout from the beginning of the process. During this time, however, the policyholder generally won’t need to take any additional actions. This timeframe just gives the other parties involved—such as the settlement purchaser—time to make sure all of the i’s are dotted and the t’s are crossed.
That being said, there are a few factors that may impact how long this process takes, including:
- The Application Process | In order for life settlement brokers and companies to perform their due diligence, a life settlement application requires some pretty detailed information, which must be vetted before the application can be accepted and the process can get underway. To learn more and take the first step toward submitting a case, you can download our explanatory brochure and questionnaire here.
- The Policy Type | Since so many different types of life insurance policies are eligible for settlements, each has its own level of nuance to it. Convertible term policies, for example, will have a set conversion date—and if that date has passed, it may no longer be eligible for settlement. Another special case is that of group life policies, which cannot be sold while you are still actively employed with the company. Your life settlement advisor can help you know exactly what to expect.
- Underwriting | Like any substantial financial transaction, life settlements require thorough underwriting. This is a behind-the-scenes vetting process into a policy’s basic eligibility for a settlement, as well as any unique circumstances that need to be accounted for. Underwriters will look for factors such as outstanding loans against the policy, for example, as well as variables like the death benefit amount, annual premiums, the insured party’s life expectancy, the policyholder’s age and health, and so on.
- Policy/Comparison Shopping | When you enlist the aid of a life settlement broker, one of their primary duties is to shop your policy around and help you evaluate your options as investors make bids on it. While it’s difficult to perfectly predict how long this process can take, your broker should be able to give you an estimate—and you can always ask for status updates along the way. It’s in your best interest not to rush this process, however, since it plays such an important role in determining your ultimate payout.
How Much Do Life Settlements Pay?
A popular rule of thumb for life settlement payout amounts is to expect around 20% of the policy’s death benefit in most cases. In reality, it’s not unheard of for certain policies to net as little as 10%—or as much as 25%—of that value. While these numbers might, at first glance, seem unimpressive, as we mentioned earlier a life settlement payout is typically 4-7 times as much as a policy’s surrender value.
One benefit of working with Life Settlement Advisors is that our team will help you understand and evaluate offers, to ensure the optimal return on your past investment.
So, how are life settlements calculated? And what is a typical life settlement payout? Let’s say you have a $250,000 policy. If you were to accept an offer that’s worth exactly 20% of the death benefit, you could expect to receive $50,000, while the lower and higher ends of the possible range would be $25,000 and $62,500, respectively.
How Much Can I Sell my $100,000 Life Insurance Policy For?
Using the same ranges and calculations as above, you might be able to turn a $100,000 life insurance policy into a lump sum of…
- $10,000 if you get 10% of the death benefit (low-end).
- $20,000 if you get 20% of the death benefit.
- $25,000 if you get 25% of the death benefit (high-end).
What Is a Life Settlement Company?
A life settlement company serves in the role of a broker, helping clients navigate the life settlement market and secure a payout.
When it comes to converting an unwanted or unneeded life insurance policy into a cash settlement, there are a few different types of professionals you might engage with, including life settlement providers and life settlement brokers.
What Is the Difference between a Life Settlement Provider and a Life Settlement Broker?
While the terms are similar, it’s important to note that life settlement providers and brokers are not, in fact, the same thing. By way of simple definitions…
- A life settlement broker is the individual or company that helps policyholders to determine whether they’re eligible for a life settlement, evaluate their options, and secure the best payout possible.
- A life settlement provider, meanwhile, refers to the individual or company that pays the settlement amount to a policyholder in order to become the policy’s new owner. A life settlement provider is the only buyer, and you will not receive competitive offers from other potential buyers.
At Life Settlement Advisors, our team of qualified brokers is ready to answer your questions and help you get started with the life settlement process when you’re ready.
How Does a Life Settlement Company Make Money?
It depends on whether the company is made up of life settlement brokers or providers.
- A life settlement brokerage typically receives a commission based on a percentage of what the policy’s sale amounts to. Since brokers are commission-based, it means policyholders will rarely have to pay an upfront cost to work through the settlement process.
- A life settlement provider, on the other hand, makes their money based on the actual sale of the policy. Once the provider has purchased the policy, they’ll take it from there, facilitating its sale to an investor and collecting the proceeds. A life settlement provider’s incentive is to pay you the least amount of money they can and sell if for the maximum they can.
Who Else Might Be Involved in the Life Settlement Process?
Life settlement brokers and life settlement providers aren’t necessarily the only parties involved in the settlement process. Depending on your specific circumstances, other parties that might play a role in the life settlement process, include:
- Advisors | Many people have personal financial advisors they work with to manage their finances and related assets. As you work through the life settlement process, you can leverage the insights and guidance of financial planners, tax advisors, and even lawyers. Collaborating with professionals you trust is the best way to ensure you get the best deal possible when shopping around an unwanted or unneeded policy.
- Life Settlement Companies | Working with an established and experienced life settlement company or brokerage firm—like Life Settlement Advisors—is a great way to manage the start-to-finish process associated with life settlements. Essentially acting in the role of a broker, these companies will help you understand your eligibility, compare your options, and make sure you understand everything that’s happening along the way.
- Life Expectancy Underwriters | These professionals play a key role in the life settlement process, as they’re responsible for reviewing the policyholder’s demographic information and medical history to determine how much your policy may be worth on the brokerage market. This is important, since one of the life settlement eligibility criteria is related to the policyholder’s life expectancy.
So… Is a Life Settlement a Good Idea?
We’ve covered a lot of ground in this article, likely leaving you with one, great-big question: Should I consider selling my unwanted or unneeded life insurance policy right now?
To wrap up and help you find the answer, let’s recap the most important factors to consider. You may be able to answer these on your own, or you may need to enlist a life settlement advisor to help you navigate one or more of these topics.
Why Am I Considering a Life Settlement?
It’s important to weigh the potential benefits against any possible disadvantages, and to understand any details of your unique situation that might impact whether it’s a good idea or not. If it is, the question then becomes whether now is the right time to sell.
Do I Qualify?
The eligibility criteria for life settlements is, for the most part, rather cut-and-dry. Remember, to qualify for a life settlement…
- You should be 65 years of age or older—though exceptions can be made for certain conditions.
- Your policy can be a term life, convertible term life, survivorship universal life, survivorship whole life, whole life, or universal life policy.
- Your policy must have a death benefit of $100,000 or more.
- The policy premium should account for less than 5% of the policy’s face value.
- You need to have held the policy for at least 2 years.
- The policy can be owned by an individual, corporate entity, business, foundation, non-profit organization, or trust.
Who Should I Work With?
Depending on your needs, you might work with either a life settlement provider or broker. Our team of highly-qualified, empathetic life settlement brokers is ready to work with you today.
What Should I Expect?
Finally, there are a few process logistics to consider.
- How Does it Work? The best life settlement companies employ a consistent and repeatable process for understanding their clients’ needs and helping them secure the most advantageous life settlement possible. At Life Settlement Advisors, this begins with helping you to understand your eligibility and options, and ends with you reviewing your offers and accepting the one that recoups the most value from your unwanted or unneeded policy.
- How Long Does it Take? It can take a few months to navigate the end-to-end life settlement process. Working with a qualified life settlement company is your best bet for a streamlined, easy-to-understand process.
- How Much Can I Get? The ultimate figures depend on many policy- or policyholder-specific details, but a popular rule of thumb says you can expect somewhere around 20% of the policy’s face value.
At Life Settlement Advisors, We’re Ready to Help
Our primary objective is in our name: we exist to help clients understand their options and make educated and well-informed decisions. When you need to find the best company to sell your life insurance policy to, working with our team helps you make smarter and more timely decisions.
- Not sure if you qualify? Use our Qualification Calculator to find out now, and to see how much your policy might be worth.
- Need more information about life settlements? You can learn more about our simple process here, or read our FAQs for more specific insights.
- Ready to take the first steps? Fill out our online form to submit your case for review.
- Need additional insight or support? Contact us directly via mail, phone, or social media.
