Life settlement

Life settlement


A life settlement is a financial transaction in which a policyowner possessing an unneeded or unwanted life insurance policy sells the policy to a third party for more than the cash value offered by the life insurance company. The purchaser becomes the new beneficiary of the policy at maturation and is responsible for all subsequent premium payments.

Life settlements are an important development in that they have opened a secondary market for life insurance in which policyowners can access fair market value for their policies, rather than accepting the lower cash surrender value from the issuing life insurance company.

Generally speaking, life settlements are an option for high-net-worth policyowners age 65 or older. Independent estimates report that among this group, 20% of policies have a market value that exceeds the cash value offered by the carrier. And while many policyowners are unfamiliar with life settlements until a financial professional mentions the option to them, the concept has gained attention from high-profile proponents such as Warren Buffett, former U.S. Representative Bill Gradison, and numerous media sources including The Wall Street Journal, Time Magazine, Business Week and The Economist. A growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial advisor.

How It Works

In a life settlement transaction, there is a chain leading from the seller of the policy to the end buyer of the policy (known as a life settlement provider). Each link in the chain has a different responsibility in facilitating the transaction and ensuring that it runs smoothly, while outside vendors typically assist the provider with specialized functions.

Policy Sellers

Candidates for life settlements are policyowners over the age of 65 who no longer want or need a particular life insurance policy. Life settlement candidates generally have a life expectancy between 2 and 20 years. There are certain restrictions for their policies as well - policies must be valued at $50,000 or more, and depending on the life expectancy determination of the seller, any and all types of policies can be sold, ie; universal life, whole life, or convertible term contracts.