Life Settlements Explained

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When a policyowner sells their life insurance policy to a third party for more than its cash value, it's called a life settlement. The person who buys the policy must take on the premium payments; essentially, they're taking on a new investment. The buyer becomes the new beneficiary when the policy matures. The former policyholder gets more than what the insurance company would pay him or her for the policy.

Life settlements make the most sense for someone who has serious health problems or a short life expectancy. The life settlement allows them to access cash they may need for medical or end-of-life expenses or to reinvest in something more practical for their circumstances. If the policyholder were to just stop paying the premiums, the policy would lapse and they would get no return. To be eligible for a life settlement transaction, the policy must be worth a minimum of $100,000, so usually it's more affluent people who get involved in these transactions.

Life settlements are big business. Financial advisors and companies now view life settlements as a viable investment tool and the market is quite competitive since there are billions of dollars in these investments. Because these transactions are complicated, policyholders should work with a professional rather than trying to broker their own deals.

Life settlements are similar to real estate transactions in that buyer and seller must go through a number of steps to protect everyone involved in the transaction. Steps include:

• The policyholder becomes interested in selling the policy and sits down with a qualified financial advisor.
• The financial advisor shops the policy to interested parties, including investment groups, and gives information about the owner's medical status.
• Once the policyholder agrees to accept an offer, they and the advisor must submit the necessary papers, which include the change of policy ownership with the insurance company.
• The buyer completes his paperwork and puts the agreed-upon price in an escrow account.
• Money goes to the seller and the policy goes to the buyer once everything is verified.
• It's up to the new policy owner to continue paying the premiums.

When handled correctly, life settlements are beneficial to all parties. The original policyholder has ready cash to use for the rest of his or her life, the new policy owner profits, and the insurance company still has someone paying the premiums.