Understanding Life Settlements: What They Are and How They Work
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to a third-party investor for a lump sum that’s greater than the cash surrender value but less than the policy’s full death benefit. After the sale, the buyer takes over premium payments and becomes the policy’s beneficiary.
Why Do People Consider Life Settlements?
There are several reasons policyholders explore life settlements:
- Premiums have become too expensive — The policy may no longer be affordable or necessary.
- Changing financial needs — Some use a life settlement to help fund retirement, medical bills, or long-term care.
- The policy no longer fits their goals — Children may be grown, estate plans may change, or coverage may no longer be needed.
Who Typically Qualifies?
Life settlement buyers generally look for policies that meet these criteria:
- Insured age: Typically 65+ (younger individuals may qualify in some cases).
- Policy type: Universal life, whole life, variable universal life, and some term policies.
- Policy size: Usually $100,000 or larger.
How the Process Works
Life settlements follow a structured process to protect both sellers and buyers:
- Policy review — An evaluation of the policy’s current value, premiums, and projected costs.
- Health assessment — Investors review health information to estimate life expectancy, which influences the offer.
- Receiving offers — Multiple buyers may submit bids.
- Completing the sale — Upon acceptance, the seller receives funds and the buyer takes ownership of the policy.
Benefits and Considerations
Benefits:
- Receive cash now rather than surrendering the policy for less
- Eliminate ongoing premium payments
- Flexibility to use funds for any purpose
Considerations:
- Tax implications may apply
- Proceeds may affect eligibility for certain benefits
- Heirs will no longer receive the policy’s death benefit
Is a Life Settlement Right for You?
A life settlement can be a smart financial option for those who no longer need their policy or want to reduce expenses in retirement. It’s important to work with a trusted advisor who can help you evaluate your policy, compare offers, and understand the financial impact.
If you’re considering a life settlement or simply want help exploring your options, our team at Victory Brokerage, Inc. is here to guide you.