Before you can determine what type of policy to purchase for yourself, you need to know the details about insurance policies, the price of purchasing one, how to sell one to make money, and the premiums required to pay for the insured person’s policy.
What is a life settlement?
Before you can get a life settlement, you need to know what it is and who it can benefit from. A life settlement is the sale of a life insurance policy to a third party. Oftentimes, this sale means the third party will earn more money than the cash value of the settlement and life insurance policy.
The cash surrender value, which is the price of the life insurance policy, is the cash amount offered to the owner of the policy by the life carrier. When someone cancels a life insurance policy, they will obtain the cash surrender value when the contract is canceled. The owner of the policy will get the cash value of the policy within the life insurance contract.
However, if the third party earns the life insurance policy value, the amount is more than the cash surrender value when discussing life settlements. Therefore, a life settlement is a better payout for the third-party investor than the cash value would be to the policy owner.
It sounds confusing, but basically, a life settlement is the process of the third-party investor earning more on the life insurance policy than the policy owner. The investor who takes over the existing life insurance policy is then responsible for any payments required to continue the life insurance payments, such as the premiums. However, the payout includes the death benefit when the previous owner of the policy or the insured dies. This means that when the person the life insurance related to dies, the investor will get the death benefits and the life settlement.
What if the investor sells the life insurance policy? Although a big payout is available in the end, the third party investor can sell if they can no longer keep up with expensive premiums attached to the life insurance policy, they do not want the policy, or they do not have the extra cash to continue paying. If they need to save money for other aspects of their life, you will typically find the third-party investor selling the life insurance policy prematurely before the insured passes away.
If the investor wants to sell the life insurance policy, there are a few things to keep in mind before selling (or buying in the reverse instance). The third-party needs to consider the life expectancy of the person insured, the cost of premiums, the payout, the risk of policy expiring, and the discount rate.
Typically, if investors find the life expectancy of the insured is very low and less than a few months or a few years, they will keep the policy since the premiums will not be continuing for a long time and they will get a payout in the end. However, they have to take into account the cost of future premiums before making their decision, as they might not be able to afford the premium costs for many more months or years.
Furthermore, the third party must consider the payout. Will the money they make than the insured die worth the premium payments and the effort? If the answer is no, they will typically sell the life insurance policy and avoid having to pay any more premium in the future.
What is a life settlement? Who purchases a life settlement? In 2020, there were just over 3,200 life settlement policies purchased during the year, with a total payout of around $4.6 billion. In 2019, the number was lower, with just 2,700 policies purchased for around $4.4 billion. Unfortunately, over 10 million life insurance policies lapse per year, meaning the third party investor does not get the money, they do not pay the premiums, and the policy goes to waste.
Trends in life settlements
When asking yourself what is a life settlement, you need to take into account trends that can occur in this industry. The first trend is the rise of investors. Many huge corporations invest in life settlements policies, such as Vida Capital. Since they invest such a massive amount of money in the life settlement policies, such as over one billion in assets, they will have a huge payout in the end.
The second key aspect of life settlements is the direct-to-consumer initiative that focuses more on the consumer than other third parties. Instead of huge corporations or third-party people getting involved in the process, the consumer initiative helps reduce the amount paid to policy owners and focuses on a higher payout for the buyers of the policies themselves.
The final trend of life settlements is the change in medical underwriting which helps avoid losses in the industry. The change in the underwriting process has helped people avoid losing thousands, or millions, of dollars, due to the clear data and inclusion of statistics.
What to consider before selling a life insurance policy
If you answered what is a life settlement, you might be wondering if you should sell your insurance policy. However, this process depends on various factors, such as the following:
- Life insurance needs – if you want to purchase a new life insurance policy to get a life settlement, you need to figure out the amount of coverage you require and how expensive it will be. Your old policy can sometimes help you get more coverage for your new policy. However, keep in mind the premium costs can skyrocket due to age changes or health alterations.
- Less costly options – the second factor to take into account is just getting a less pricey alternative to your current policy. Instead of selling your policy to get quick cash, switch your policy to a cheaper option so you can spend less per month.
- Impact on your financial state – the final aspect to take into account when deciding whether to keep or sell your life insurance policy is the impact it will have on your financial state. Before you get a life settlement, make sure you understand how this can influence your finances.
If you’re asking yourself what a life settlement is, you are not alone. This process can be complicated and confusing but can end up giving large amounts of money to the third party investor at the end. However, make sure you completely understand the process of getting and selling life insurance policies before discussing a life settlement.