88% of all universal life policies that are issued are lapsed or surrendered — without payment of a death benefit — because policyholders no longer want or need their policies, or they can no longer afford them. It is important to note that in 1911, Life Insurance was deemed personal property by the United States Supreme Court. In other words, just like a house or car, it’s a legal right to sell a life insurance policy. That is where life settlements come in.
The sale of a life insurance policy is called a life settlement. With a life settlement, the cash received will be more than its cash surrender value, but less than its death benefit.
Once a life insurance policy is sold, the money belongs entirely to the seller and can be spent at his or her discretion. Life Settlements can also be in the form of a paid-up death benefit.
Why Would Someone Consider a Life Settlement?
Some reasons a life settlement should be considered include:
- No longer affording the premiums
- Funding is needed for medical care or other expenses
- Life circumstances have changed
- Supplemental income for retirement is needed
People age 65 and or older are often eligible to sell their life insurance policy if the face value of the policy exceeds $100,000. Each life insurance policy is priced individually using personal details such as policy type, policy face value, age, and health status.
Life Settlement Options
With a life settlement, there also various options to choose from depending on someone’s financial situation. The three options are retained benefit, traditional, and hybrid.
The Retained Benefit option means no longer needing to pay any premiums and a portion of the benefit is retained. Beneficiaries will receive a guaranteed percentage when the policy ends, but there will be no further obligations or payments to make.
The Traditional option means that the full life insurance policy is sold for a cash amount above the policy’s surrender value.
The Hybrid option is a combination of the other two options (Retained Benefit and Traditional), where a portion of the life insurance policy is sold. With this option, a cash payment is received now, the beneficiary receives a guaranteed percentage of the benefit when the policy ends, and there is no further obligation to pay future premiums.
Throughout the past decade, life settlements have become exceptionally well-regulated as more senior Americans become aware of life settlements as a financial option. For the market to ensure ethical and safe transactions, the life settlement industry is regulated on a state-by-state basis. The majority of states require specific licensing and practice strict oversight to ensure customer safety. It is important to verify if a life insurance buyer is licensed in the state of the policy holder’s residency.
Researching the background of a life settlements company prior to working with them is necessary. Making sure the company has a good-standing legal history along with an A+ rating with the Better Business Bureau ensures the confidentiality of your information.
While the awareness of life settlements as a financial option has grown through the decade, many seniors still do not know about it. Many boomers and seniors will experience financial hardship without knowing such an option is available to them. Life settlements represent a safe option to retirees who need money and want to use their policy as a living benefit today.
For more information, contact Abacus Life.