Definition
A life insurance settlement is the process through which a life insurance policyholder sells their policy to a third-party investor for a lump sum payment. This amount is typically more than the policy’s cash surrender value but less than its net death benefit. The buyer becomes the new beneficiary of the policy and takes over the premium payments. Upon the death of the original policyholder, the new owner receives the death benefit.
Examples
John’s Policy Sale: John, aged 75, has a $1 million life insurance policy. He no longer has dependents and decides to sell his policy. He receives a lump sum of $300,000 from a life settlement company. The company becomes the beneficiary and pays the policy’s premiums until John’s death, after which it collects the $1 million death benefit.
Corporate-Owned Policy: A corporation owns a life insurance policy on a key executive who retires. The company decides it no longer needs the policy and sells it via a life insurance settlement, recouping some of the premiums paid over the years.
Frequently Asked Questions (FAQs)
What is the difference between a life insurance settlement and a viatical settlement? A viatical settlement is similar to a life insurance settlement but specifically involves selling a policy from someone who is terminally ill, typically with a life expectancy of less than two years. A life insurance settlement usually involves healthier seniors.
Who is eligible for a life insurance settlement? Eligibility can vary, but policyholders should generally be over age 65, or younger if they have significant health issues. Policies should have a face value of $100,000 or more.
How is the cash settlement value determined? Factors influencing the settlement amount include the policyholder’s age, health status, policy type, face value, and premium costs.
Are life insurance settlements taxable? The tax implications of a life insurance settlement can be complex. Generally, proceeds in excess of the policy’s cost basis may be taxable. Many people seek advice from a tax professional to understand potential liabilities.
Why would someone choose a life insurance settlement? People might pursue a life insurance settlement if they no longer need the coverage, can no longer afford premiums, or need funds for retirement, healthcare, or other expenses.
Related Terms
- Viatical Settlement: The sale of a life insurance policy by a terminally ill policyholder.
- Cash Surrender Value: The amount an insurer pays to the policyholder when a life insurance policy is voluntarily terminated before its maturity or the insured event occurs.
- Death Benefit: The amount paid to a beneficiary upon the death of the insured person.
- Policyholder: The owner of the life insurance policy.
- Beneficiary: The individual or entity designated to receive the death benefit from a life insurance policy.
Online References
- Investopedia: Life Settlement
- US Securities and Exchange Commission (SEC): Investor Bulletin - Life Settlements
- National Association of Insurance Commissioners (NAIC): Life Insurance and Annuities
Suggested Books for Further Studies
- “Life Settlements Explained” by Frank Abagnale
- “Life Insurance and Its Applications” by Tony Steuer
- “The Encyclopedia of Life Insurance” by Glenn S. Daily and Kirk A. Barber
- “Navigating Life Insurance Settlements” by Sue Subbotin
Fundamentals of Life Insurance Settlement: Insurance Basics Quiz
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