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The Ins and Outs of Life Insurance Settlements
from:A life settlement is basically a transaction where a life insurance policy feels that the policy he is maintaining is now unwanted and/or unnecessary. Instead of surrendering it back to the insurance company, for which he will get little to nothing for it, he can sell the policy to an interested party (also known as a life settlement provider).
The result is cash in lump sum for the original owner and and the purchaser becomes the new owner of the policy’s and the benefits from its maturation. The new owner also becomes responsible for paying the premiums from the time of the policy is bought until the original owner dies.
What is interesting about this transaction is that only a few policy owners are aware of this option unless brought to their attention by a finance professional. Unlike transactions with stocks and bonds, this life settlements have yet to become a popular financial product.
A survey of financial advisors conducted by a leading insurance firm showed that nearly 50% of all respondents had clients who gave up their life insurance policis for as little as $0 when these policies could have fetched a much larger amount had it gone through life settlement.
Who sells?
Policy sellers are the original owners of the life insurance policies. Their general demographic are senior citizens 65 years old and above whose life expectancies range from two to ten years more. They more often have not, have seen a significant rise in their insurance payments and because of this, many opt to take a settlement with their policies.
There are, however, certain restrictions: one being that policies must be worth more than $100,000. Another factor concerns the seller’s life expectancy. Aside from that, all types of life insurance policies can undergo settlement (i.e. convertible term, universal life or whole life).
Who advises?
Most life settlements are done in consultation with financial advisors and the transaction is rarely done by the policy holder himself. Such advisors are accountants, lawyers, financial and estate planners as well as certified senior advisers (CSA).
Who facilitates?
These advisors can bring up their advisee’s policy directly to the attention of the life settlement provider. However, this makes for a significantly smaller net to cast bids and offers for the policy to be sold. It is therefore common for the owner to contract the services of a broker who is in the best position to get a fair market price for the policy concerned. By offering the same policy to several providers who will be able to secure more bids and help carry out negotiations. Just make sure, though, that the broker you choose is licensed and qualified to carry out such transactions on your behald.
Who buys?
A life settlement provider will pay the original owner the amount which will be worth more the original policy's surrender value. Each seller’s policy is an asset kept secretly and are not accessible to external investors. In addition to these functions they also review transactions made in-house and inform financial professionals as well as current policy holders on the workings of life settlements. To add security and reputation, life settlement providers are supported by funds from one or more major banks.
How does it go? Here are the steps done in transacting a life insurance settlement:
1. With consultation with advisor, the original policy (client) holder decides to have his insurance policy settled.
2. Client selects a broker.
3. Upon client’s submission of medical info, broker submits client’s policy information to several providers.
4. If policy meets standards, providers bid for the policy via the broker, who passes them onto client.
5. Client chooses (or negotiates) with chosen provider.
6. Provider's offer is closed and essential documents are returned.
7. Cash payment (in escrow) is placed by the provider and change of ownership forms are submitted to insurance company.
8. Paperwork is confirmed by insurance company and the corresponding funds are paid to the client.
When should you considered life settlement?
- When premiums become too expensive or unmanageable.
- You require long-term medical care.
- Your employment status changes.
- Bankruptcy
As it is with any other financial asset, a life insurance policy can be liquidated given certain conditions. The decision to carry out such a transaction, though, should be given much thought and consultation with your financial advisor. With enough preparation and consideration, the benefits of settling your life insurance policy may reap significant rewards for yourself in a much sooner time than what your original policy could ever achieve.
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