What is a life insurance settlement?
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UPDATED: Jul 26, 2011
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Life insurance settlements, also called “life settlements,” are transactions whereby an older person sells his or her life insurance policy for a portion of the face value. This gives the aged person immediate cash, and guarantees the investor a return on the money spent in a relatively short period of time.
For example, suppose that an 80-year-old lady has two policies with face values of $10,000 each. She will use one for burial purposes, so one would go to the beneficiaries. However, she needs cash for immediate expenses. An investor might offer to buy one of her policies for $7,000. Although this is $3,000 less than the face value of the policy, the lady in question receives immediate money for her expenses which she could not otherwise get. The investor knows that the lady will not live much longer due to her advanced age, so he is content that he will realize $3,000 on his investment in the near future.
The Value of Cash Now
The value of immediate cash to a senior citizen cannot be underestimated. Seniors are often faced with unexpected expenses and have little income to combat such costs. Few seniors can borrow money from a bank, due to the fact that they are not employed and are on a fixed income. Banks may also be reluctant to lend money to a senior due to the fact that he or she may die suddenly, and it will be difficult to collect the debt. If a senior citizen needs money for medical expenses or to help a family member, selling a life insurance policy makes sense and may be the only financially sound option available.
Senior citizens can usually surrender their policies for cash value to the company that holds them. However, the cash settlement value is often far less than they could receive from an investor in a life settlement proposal. In fact, cash surrender values are typically so low that it makes more sense to keep the policy and borrow against it, rather than surrender it and abandon years of payments. Faced with this proposition, it is not surprising that many seniors choose to deal with a life settlement broker.
Who are Life Insurance Settlements for?
Life settlements are typically offered to persons over 70 years of age. Investors prefer a face amount of $50,000 or more, although some companies will work with smaller amounts. If the policy has a low cash surrender value, it is of more benefit to the owner to liquidate the policy through a life settlement, so investors target policyholders who have low cash values. Also, as the investor will be paying the premiums for the life of the policy, it is important for the premiums to be reasonable in order to attract investors. Whole life policies typically have higher cash surrender values, but they also have higher premiums, so some investors prefer to deal with term policies, while others target whole life policies. Policies must be more than two years old to qualify, as there are usually restrictions on payouts in the first two years of a policy.
Disadvantages of Life Insurance Settlements
There are detractors of the life settlement system. Some claim that it takes advantage of senior citizens who are often duped by unscrupulous investors. Others claim that the percentage of payout is not commiserate with the money paid in by the seniors over the years to “pay up” the policy. Other say that the idea of cashing in on someone’s death is unethical. However, investors and proponents of the system point out that the practice has been in existence for at least 100 years, and serves a need not addressed by many organizations responsible for caring for senior citizen’s needs.
There are many life settlement investors working in today’s market, and it is important to choose a reputable dealer to insure that your transaction is handled honestly and smoothly. The best way to do this is to review the company carefully, and talk to others who have dealt with the company in the past. If the policyholder is uncomfortable doing internet research, as many senior citizens are, then a broker can assist in finding a good investor. Most brokers work on a commission fee system, so it is in their best interests to match prospective sellers with investors. However, beware a broker who wants to push you into a settlement scheme with which you are not comfortable. Ask for references for any broker or investor with which you do business, and contact the references for details of their transactions. You should also be careful of an investor who offers you a great deal more than any other investors; this is a good sign that the person is not an honest business person.