A life settlement refers to selling to a third party one’s life insurance policy. This can be sold at an amount less than the net death benefit and more than its cash surrender value. A person who may no longer want or need the policy or has purchased another insurance policy can consider a life settlement. The same is true for someone who may find premium payments no longer affordable.
How Does a Life Settlement Work?
A life settlement can be an excellent option for those who want to enjoy their retirement with less stress and hassles caused by unpaid debts. You may consider a life settlement if your long-term need for insurance or health status has changed. It also applies if you want to fund an investment or pay off a mortgage. A life settlement calculator can be used to assess how much you’ll get from the sale.
As an example, let’s say David Smith has a universal life insurance policy and decided that he no longer has any use for it. David thinks that he doesn’t need to leave his children any more money because they have their jobs. So, he decides to get rid of his universal life insurance policy to get the cash value and stop paying his premiums.
David Smith sells his insurance policy to a life settlement provider. David then receives the cash to use however he wishes, such as paying for medical expenses, taking a grand vacation, or funding retirement. On the other hand, the life-settlement provider will make premium payments on his behalf. The life-settlement provider will take over his insurance policy. When David passes away, the life-settlement provider will receive the death benefit.
Life Settlement History
In the early 1900s, there was a Supreme Court case in the United States involving life settlement. Grigsby v. Russell pointed out that life insurance policies are considered personal properties, so the owners have the right to liquidate it.
Justice Oliver Wendell Holmes has noted in his opinion that life insurance possesses all the characteristics of a property, so it is considered an asset, and the policy owner can transfer it without limitation. He noted that life insurance is a recognized form of investment.
The life insurance policy’s ownership rights have the same legal footing as stocks, bonds, and other traditional investment properties. That’s why a person can transfer their life insurance policy to another person at their discretion.
This case decision has established a life insurance policy. Now it is a transferable property containing specific legal rights, such as the right to:
- Name the beneficiary of the insurance policy
- Change the designation of the beneficiary
- Sell the life insurance policy to another party
- Assign the insurance policy as a loan collateral
- Borrow against the life insurance policy
The National Association of Insurance Commissioners or NAIC in 2001 released the Viatical Settlements Model Act. It sets forth guidelines to avoid fraud and ensure sound business practices. Using institutional capital, many life settlement providers started purchasing life insurance policies for their investment portfolio.
Well-funded corporate entities, like QLS, have changed the settlement concept into a trusted and reliable wealth management tool. It is now used to assist high-net-worth life insurance policyholders who no longer need their policies.
Why Consider a Life Settlement?
There are many practical and sensible reasons why you should consider a life settlement. In the first place, you have invested in a life insurance policy so you can provide for your children. Now, you find your children financially well-off and no longer require this assistance. You can consider a life settlement so the funds can be used for a better life. You can use it for medical care as you grow older to avoid putting financial pressure on your children.
Here are other scenarios wherein you could consider a life settlement:
- Divorced spouses who purchased a policy together without children
- You’re on a retirement budget, and your monthly premiums are troublesome to pay
- The policyholder wants to get additional value for the insurance policy instead of accepting the cash surrender value or letting it lapse
- Medical care is becoming costly, so asset liquidation is required to qualify for Medicaid
Conclusion
Regardless of your current situation, life settlement allows you to take full control of your finances. A life settlement can help you manage major life changes, from divorce to retirement, and allow you to experience the happiness of seeing your children achieve financial independence. You can always work with a trusted advisor to generate your substantial liquid assets, like a life settlement, right when you need it the most.
