What is a life settlement (LS)?
It’s simply the sale of a life insurance policy to a third person or corporate buyer.
LSs are for someone who purchased a life insurance policy, no longer needs that particular policy (for a variety of reasons discussed below), and would like to sell the policy today for cash and use the proceeds for any number of different purposes.
Why sell a life insurance policy?
We think a better question is why keep a life insurance policy you have no need for. There are two main reasons people buy life insurance:
To protect the family in case the “breadwinner” (parent who makes the most money) dies.
To pay for estate taxes so wealth can be passed to the heirs at the second spouse’s death.
Let’s look at a few real world examples of people who no longer need their life insurance policy.
If someone bought a life policy to take care of a spouse, but the spouse died first, then the need for the policy no longer exists and is then a candidate for a life settlement. The same would be true if the life policy was purchased for the spouse’s benefit and then the couple divorced. Similarly, if someone bought a policy to benefit a child upon the death of the parent, except the child died first, the life insurance becomes unnecessary.
If a policy owner wanted to pass wealth to a beneficiary, and then the beneficiary turned out to be a criminal or otherwise became estranged from the family, the policy owner might decide to put the assets in the policy to better use during the policy owner’s life.
Common reason to sell a life insurance policy
The main other reason to sell a life insurance policy is because you can no longer comfortably afford to pay the premiums and/or you need cash. This is a common occurrence with seniors who did not plan well for retirement and have increasing medical expenses. Many have life insurance policies into which they’ve been paying premium for years. Instead of surrendering the policy for cash, a policy owner may be able to receive significantly more money by selling the policy.
Summary of Life Settlements
While the topic of Life Settlements is not in the main stream, it can be a valuable tool when looking at someone’s overall estate/financial plan.