Life Insurance Settlement

A Life Insurance Settlement is the sale of an existing life insurance policy to a third party for a lump sum that is greater than the policy's cash surrender value but less than its net death benefit.

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

  1. 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.

  2. 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.

  • 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

  1. Investopedia: Life Settlement
  2. US Securities and Exchange Commission (SEC): Investor Bulletin - Life Settlements
  3. National Association of Insurance Commissioners (NAIC): Life Insurance and Annuities

Suggested Books for Further Studies

  1. “Life Settlements Explained” by Frank Abagnale
  2. “Life Insurance and Its Applications” by Tony Steuer
  3. “The Encyclopedia of Life Insurance” by Glenn S. Daily and Kirk A. Barber
  4. “Navigating Life Insurance Settlements” by Sue Subbotin

Fundamentals of Life Insurance Settlement: Insurance Basics Quiz

### What is a life insurance settlement? - [ ] The amount paid out to beneficiaries after the policyholder dies. - [ ] A type of insurance that combines life and health coverage. - [x] The sale of an existing life insurance policy to a third party for a lump sum. - [ ] The dividend paid to policyholders of a mutual life insurance company. > **Explanation:** A life insurance settlement involves selling an existing life insurance policy to a third-party investor for a lump sum. ### What is typically greater in a life insurance settlement? - [x] The lump sum paid vs. the policy's cash surrender value. - [ ] The policy's cash surrender value vs. the death benefit. - [ ] The policy's death benefit vs. the lump sum paid. - [ ] None of the above. > **Explanation:** The lump sum paid in a life insurance settlement is typically greater than the policy's cash surrender value but less than the death benefit. ### Who benefits financially from the death benefit in a life insurance settlement? - [ ] The original policyholder. - [x] The third-party buyer. - [ ] The insurance company. - [ ] The government. > **Explanation:** The third-party buyer benefits financially from the death benefit upon the policyholder’s death after purchasing the policy. ### Under what conditions do viatical settlements take place? - [ ] The policyholder is over 65 years old. - [ ] The policyholder is terminally ill. - [ ] The policyholder has experienced property damage. - [ ] The policyholder is looking to buy a new policy. > **Explanation:** Viatical settlements occur when the policyholder is terminally ill and sells their policy. ### Who becomes responsible for premium payments in a life insurance settlement? - [ ] The original policyholder. - [x] The third-party buyer. - [ ] The beneficiary. - [ ] The policyholder's employer. > **Explanation:** In a life insurance settlement, the third-party buyer becomes responsible for future premium payments. ### What type of policies typically qualify for a life insurance settlement? - [ ] Policies with a face value less than $50,000. - [x] Policies with a face value of $100,000 or more. - [ ] Group life insurance policies. - [ ] Term life insurance policies only. > **Explanation:** Policies with a face value of $100,000 or more typically qualify for life insurance settlements. ### What should policyholders consider before pursuing a life insurance settlement? - [ ] The mode of premium payment. - [x] The tax implications. - [ ] The size of the insurance company. - [ ] The gender of the policyholder. > **Explanation:** Policyholders should consider the tax implications before pursuing a life insurance settlement, among other financial and personal factors. ### Which factor does NOT influence the life insurance settlement value? - [ ] The policyholder’s age. - [ ] The policy type. - [ ] Premium costs. - [x] The lapsation rates of similar policies. > **Explanation:** The lapsation rates of similar policies do not directly influence the value of an individual life insurance settlement. ### Who receives a lump sum payment in a life insurance settlement? - [ ] The insurance company. - [x] The original policyholder. - [ ] The new beneficiary. - [ ] The policyholder’s estate. > **Explanation:** The original policyholder receives a lump sum payment in a life insurance settlement. ### What type of settlement involves selling a life insurance policy to fund a terminal illness? - [ ] Standard life insurance settlement. - [x] Viatical settlement. - [ ] Premium financing settlement. - [ ] Annuity settlement. > **Explanation:** A viatical settlement involves selling a life insurance policy to fund a terminal illness.

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Wednesday, August 7, 2024

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