Life Settlements Explained.
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Sell Your Life Insurance.
A Life Settlement is the industry term for selling your life insurance policy to an investor for cash. Just like your house or car, your life insurance is an asset that can be sold. The average cash payout for a policy is 26%, but can range from 15% to 50%+ depending on the policy.
Seniors pursue a life settlement for several reasons. For one, you can use the cash while living with no restrictions. Fund your life - Live better, help fund retirement, or pay for expenses.
The amount received for the life settlement is more than the surrender value, but less then the death benefit.
In a life settlement transaction, the seller transfers ownership of the policy to the buyer in exchange for a cash payment that is largely tax-free. The seller is no longer required to pay the premiums.
The buyer takes on the liability of making the premium payments and receives the death benefit.
How Many Different Options Are There?
The Traditional option is to sell your full life insurance policy for a cash amount above the policy’s surrender value. You have no further premiums to pay or claims to the benefit. You get cash for the policy and all future premiums paid by the buyer.
The Retained Benefit option means you would no longer pay any premiums and retain a portion of your benefit. Beneficiaries will receive a guaranteed percentage when the policy ends, but you have no further obligations or premium payments to make.
The Hybrid option is a combination of two, where you would sell a portion of your life insurance policy. With this option, you receive a cash payment now and your beneficiary receives a guaranteed percentage of the benefit when the policy ends. With this option you will have no further premium payments or obligations.
Terms To Know:
Life Settlement - The sale of a life insurance policy to a third party investor for a cash payout higher then the Cash Surrender Value.
Cash Surrender Value - The amount of money a policy owner receives if they cancel their policy. The total amount received is the policy's cash value minus fees associated with the cancelation.
Death Benefit - The money a beneficiary receives upon the death of the insured person on the policy.
Viatical Settlement - A type of life settlement designed for terminally ill individual.
Fund Your Life.
A life settlement is a great financial option if you no longer have a need for your life insurance policy. The major reason people sell their life insurance is the policy owner needs money during their life.
Don't lapse or surrender your policy. Life settlement can best satisfy financial needs because it provides a unique opportunity to receive the "true market value" for your life insurance policy.
If you qualify, POLICYMARKET can guide you through the process of selling your policy and get you the fair market value in an upfront payout.
SHOULD I SELL?
Reasons To Sell Your Life Insurance.
1. You can no longer afford the premiums.
The cost of your premiums may be going up and become too expensive. A life settlement is a great alternative option to letting your policy lapse. If you let your policy lapse you may receive a portion of the cash surrender value, but if your sell your policy, you receive more.
2. You need extra money for living.
Fund your life - Perhaps you want a better retirement. You only live once so make sure you live well. Maybe you need to pay for an upcoming medical expense or other large purchase.
3. You no longer need your policy.
You may not realize your life insurance policy may be your biggest asset after your home. Are your children grown and financially independent? If you no longer need the policy benefits, it makes sense to pursue a life settlement and have access to the cash while you are living.
4. You are looking to supplement your retirement.
The majority of Americans don't have enough money saved and will out live their retirement. A life settlement allows you to supplement your retirement income so you can fund your life.
5. You need to cover unexpected expenses.
Unexpected expenses can be devastating to people, especially during their senior years. Selling your life insurance policy can help you pay for medical bills or long-term care.
An Example of Success
POLICYMARKET got her a $265,000 Payout.
Barbara's agent realized that she was over-insured relative to her financial situation - and she could no longer afford to keep paying her Universal Life policy premiums. Instead of lapsing the policy, her agent learned about life settlements and asked PolicyMarket if we could help.
PolicyMarket matched Barbara with an institutional buyer who gave Barbara $265,000 in cash. PolicyMarket has helped many people like Barbara.
HOW IT WORKS
What Do I Need To Know?
A life settlement can take approximately 3-8 weeks in total and with others companies many times 3-4 months. During that time, all the necessary information is collected such as policy documents, signed forms and the insured's medical information. This information is then packaged and presented to potential licensed providers (buyers) who are interested in purchasing the life insurance policy.
It is important to know the real value of the policy and have someone on your team during the life settlement process. This insures you will get the highest value from the buyer (investor).
POLICYMARKET represents you and often times gets sellers 2-4 times the value for the policy, then if the policy owner or agent got an offer directly from the buyer.
Here's a graphic that is helpful in understanding a life settlement.
The Life Settlement Process
Application: The first step is to fill out an application. This form can be completed online, by hand, or a combination of the two. The application will ask for basic personal information, including the insured's health and age, along with questions about the life insurance policy. During the application process, you will be asked to sign release forms that allow access to your medical records and insurance policy illustration. These records are needed to determine the cash payout amount.
Documentation: PolicyMarket will use the release forms to gather your medical records and policy illustration if you don't have a copy. You may need to follow-up with your doctor’s office or insurance provider to confirm that it is okay to release this information.
Review: There is now enough information to determine the value of your life insurance policy. PolicyMarket uses complex computer algorithms to determine a strong understanding of what the buyer will be willing to pay and work to get you the highest value. The life settlement buyers (providers) will then decide whether or not they want to purchase your policy and the price they are willing to pay. It is possible that, a buyer will determine that it doesn’t make sense to purchase your policy.
Offer: PolicyMarket will communicate the payout offer either directly to you or your advisor (such as your broker or insurance agent). You always have the right to walk away from the transaction if the offer doesn't satisfy you.
Closing package: The closing process is similar to selling a house. The exact contents of a life settlement closing package are determined by the provider and state. This process may require several different signing parties depending on who owns the policy and who the beneficiary is. The closing begins the process of transferring ownership from you to the new buyer. The closing package often includes include a letter of competency (LOC), verification of coverage (VOC), life settlement contract, change of ownership form (COO), and change of beneficiary form (COB).
Funds Transfer: Once the insurance company has verified the change of ownership, the payout funds are transferred from the escrow account to the (now former) policy owner. Funds can be paid directly to your bank account or by check.
AM I ELIGIBLE?
Qualifying for a Life Settlement
Just because you want to sell your life insurance doesn't mean you always can. The purchase has to be a good deal for the buyer as well. For a life settlement to work for the buyer, they need to know that the cost of maintaining the premium payments will be economical until you pass away and they can collect the death benefit. There are many factors but here are the main ones:
1. You need to be over 65 years old.
Your life expectancy is the most important variable in the buyer's equation. Life expectancy is closely tied to your age.
2. Your policy must be at least $100,000 in face value.
Policies smaller than $100,000 are not necessarily worth the cost to transact and maintain for the buyer.
3. The premium payments must be manageable for the buyer.
Many people want to sell their life insurance when their premium costs begin to soar. The buyer of the policy will incur those same premium costs, so they want to make sure that it's affordable for them.
4. The policy must be of a certain kind.
Policies types that have a market to sell are Universal Life, Whole Life and Convertible Term Life.
Sell Your Life Insurance.
Fund Your Life.
How Is The Value Of A Policy Determined?
When determining the payout for a policy, the buyer (life settlement provider) tries to figure out how much premium they will pay into the policy until the death benefit is collected. They have to make sure the investment makes economical sense.
The Most Critical Factors Life Settlement Providers Evaluate Are:
1. Age & Life Expectancy.
The older the insured is, the more the policy is worth. During the application process the insured signs HIPPA medical release forms allowing access to obtain medical records. Medical records are obtained and reviewed by medical underwriting firms to determine the life expectancy. The lower the life expectancy the more value the policy has because a buyer will have to make less premium payments.
2. Cost of keeping the policy (future premiums).
The lower the premium cost, the more value.The in-force illustrations details the numbers and cost of the policy each year. Your agent can access a current illustration on your behalf and provide it to PolicyMarket.
3. Policy Size
The larger the policy benefit, the more value for a life settlement. The minimum size policy to be eligible is $100,000.
With all the above information, life settlement companies use complex mathematical equations to determine the value.
Don't worry, POLICYMARKET knows how to do these calculations too.
POLICYMARKET uses complex computer algorithms to determine the fair market value of your policy. We use this data to get you highest value on the market.
How Is Life Expectancy Calculated?
As we mentioned above, when determining a policy’s value, life settlement companies look very closely at life expectancy.
Basic life expectancy calculators, like the one used by the Social Security Administration only look at age and sex. The models used by life settlement providers and underwriters are much more complex.
Life settlement companies and your insurance company use actuarial tables and medical underwriting when calculating your life expectancy. Medical underwriters use data such as age, gender, smoking habits, and medical records are used to give a better idea of life expectancy.
The underwriting process used to take weeks, with PolicyMarket new technologies are allowing underwriting to happen much quicker. Medical records, insurance claim data, and medicare are available electronically allowing computer simulations to quickly determine life expectancy.
WHAT HAPPENS AFTER I SELL?
When You Sell Your Life Insurance Policy:
1. You Get a Cash Payout
You receive payment immediately after the change of ownership is confirmed.
2. You Stop Paying Premiums
You no longer pay the policy premiums. The buyer is now responsible for paying the insurance company directly.
3. You Are No Longer Covered By That Insurance Policy
Once the purchase is complete, the buyer now owns the policy. The buyer gets the benefit upon the insured's passing.
REGULATION & TAXATION
How Are Life Settlements Regulated?
Insurance is regulated on a state by state basis. Depending on the state you live in, there may be different laws surrounding life settlements.
“So far as reasonable safety permits, it is desirable to give the life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”
In 1911, In Grigsby v Russell the U.S. Supreme Court declared that your life insurance is your personal property. You have the right to assign its ownership at your discretion. This unlocked another option for policyholders - the ability to sell the policy for cash.
Life settlements is a heavily regulated industry by the state insurance regulators.
Most regulations cover:
Licensing of brokers, agents and providers (buyers)
The length of ownership before you can sell a policy
Disclosure of taxation risks
Alternatives to life settlements
Disclosure of risks to aid and assistance programs
Disclosure & Transparency
Life settlement transactions are highly regulated by each state to protect the policy owner. While each state is different the idea is generally the same.
The policy owner must be made aware of all of the risks associated with selling their policy. For example, some policy owners may find that their Medicare may end as the result of a large payout. This is not common, but it can happen.
In order to make sure the policy owner is informed, the life settlement company or broker must explain process of taxation and how it may effect a settlement.
Lastly, the amount of commission paid to must be disclosed to the policy owner.
PolicyMarket ensures transparency on all transactions throughout the process and makes sure all state regulations are followed.
All parties involved in life settlement are required to be licensed in most states. This includes life settlement brokers, providers (buyers) and agents. Your agent can help you identify licensed professionals to work with.
Life Settlement & Taxation
The recently passed Tax Cuts and Jobs Act of 2017 (TCJA), has made life settlement taxation much easier to understand and calculate.
When you sell your policy, you are taxed in three tiers:
Proceeds (the money you get for your life settlement) received up to the tax basis are free of income tax.
Proceeds received that are greater than the tax basis up to the amount of the cash surrender value are taxed at ordinary income rates (this piece is not part of a typical life settlement).
Proceeds received that are in excess of the cash value are taxed as capital gains.
So, the amount of taxable income is usually calculated by subtracting the tax basis (the total amount you’ve paid in premiums) from the amount you receive in the settlement.
Please remember that PolicyMarket does not provide tax advice. It is best to consult with your accountant or advisors on the tax implication of a life settlement. This material has been prepared for informational purposes only.
Thinking Of Selling Your Policy?
Contact Your Agent.
Selling your life insurance policy is similar to selling your house.
Your Agent is the best person to help organize the things you need for a life settlement. As when you took out your policy, or if you were selling your house, having an agent can help answer any questions specific to your planning needs, and ultimately make the process much easier and faster.
PolicyMarket has made what historically has been a difficult process to navigate much easier.
You agent will be able to work with the life insurance carrier to get necessary in-force illustrations and other documents necessary for the buyers to evaluate the policy.
If you don't have an agent, we have one we can recommend to help.
Frequently Asked Questions
FIND THE ANSWERS
What is the average life settlement offer?
The average offer can be around 26% of the death benefit in cash. So for example, a $1 million policy would give you a settlement offer of around $260,000 in cash. However, each policy and situation is unique.
How long does the process take?
The process takes approximately 3 to 8 weeks. Most of this time is transferring ownership of the policy to the new owner with your life insurance company.
What is PolicyMarket?
PolicyMarket makes the life settlement process easy and searches the market of potential buyers to find you the highest offer. We create competition with buyers to deliver you the fair market value. We are headquartered in New York.
What affects my offer?
Your offer is calculated primarily based on the insured's age, health, life insurance premium costs, and policy face value.