A life settlement is a process of selling an existing life insurance policy to a third party who is usually an experienced investor for a lump sum settlement. The one who buys the insurance policy has to pay all the premiums and receives the death benefit upon the death of the insured.
It all began in 1911 when the United States Supreme Court gave a revolutionary decision in the case of Grigsby vs. Russell. The court recognized the right of the policy owner to assign his/her life insurance policy. The Justice of this case- Justice Oliver Wendell Holmes declared that a life insurance policy is similar to any other property. Hence it can be transferred by its owner without any limitation.
The life settlement market grew in the 1980’s during the AIDS epidemic.
Due to lack of money, the terminally ill policyholders decided to transfer their insurance policies as they no longer needed it. Thus the “Life settlement” industry bloomed.
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 policyholder may select many different paths to a life settlement:
- Agents- The agents are often a part of the client’s insurance company. They act on behalf of the policyholder.
- Brokers- They are well-trained professionals who do all the work related to the settlement. These brokers keep a certain part of the settlement amount.
- Insurance providers- These companies directly buy the life insurance policy from the policyholder. There are no middlemen or brokers involved.
- 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.
Life insurance with cash value is a valuable investment which must be handled with care. The various types of life insurances which have cash values are universal life insurance, whole life insurance, and variable universal life insurance policies.
Whole life policy’s cash value can be used by policy owners to take loans or make withdrawals. These withdrawals may affect the death benefit of the policy.
In the Universal life insurance policy, the premium payments become a part of the policy’s cash value.
In the variable universe, life insurance policy is similar to a universal life insurance policy. Here the cash value is allocated to separate accounts within the life insurance policy. This cash value can be used to take loans or withdrawals by the policyholder.
Hope that this article helped you to understand life settlements and related things in a better way.
Thanks for reading!