Life Settlement FAQ – What Is A Life Settlement?

By Randall Rothschild | Life Insurance

Apr 15
Life Settlement Contract - Life Insurance Settlement Information

So what exactly are life settlements?

A life settlement is the sale of a life insurance policy or certificate issued on the life of a person, who does not have a catastrophic or life threatening illness or condition that is likely to result in death within 24 months, for a dollar amount that is less than the policy’s face value.

The person who is insured under the policy is called a “life settlor”. This person is usually the owner of the policy, but does not have to be the owner of the policy.

Only the owner of the policy has the right to sell the policy; however the owner cannot sell the policy without the beneficiaries’ consent.

The entity that buys the policy is called a life settlement provider, additionally, there are persons called brokers or provider representatives, who help with the sale of the policy. A life settlement offers you the opportunity to receive a portion of your policy’s death benefit while you are still alive.

What other things should I know about a life settlement contract?

Some things that may be affected if you enter a life settlement are:

  • There may be a loss of life insurance coverage on your spouse or other family members, if the policy (or any riders attached to it) covers their lives.
  • The amount of premiums you pay
  • Policy cash values or dividends, if provided for in the policy
  • A loss of other rights or benefits, including conversion rights and waiver of premium benefits that may exist under the your policy
  • You may incur tax consequences
  • Your ability to receive supplemental social security income, public assistance, and public medical services including Medicaid
  • The money you receive for your life settlement could be taken away from you by creditors, personal representatives, trustees in bankruptcy, and receivers in state or federal court.

Because of the above, you should contact an attorney, accountant, estate planner, financial planning advisor, tax advisor, social services agency, your insurance company, or agent, as applicable, to find out what effect selling your policy will have on you.

Are there other options available besides selling my policy?

Your insurance company may offer options, such as:

  • Accelerated death benefits
  • Loans
  • Surrender of the policy for its cash value

Before entering into a life settlement, you should contact your insurance company or agent to see what options are available.

How will I know if my policy includes extra coverage like accidental death, future increases in the death benefit, or covers other family members? Do these affect my settlement?

Some policies contain extra coverage. You may want to contact your insurance company or agent to see if your policy contains a provision or rider providing extra coverage.

If your policy includes a benefit for accidental death, the additional death benefit may not be included as part of your settlement. However, the additional death benefit may remain payable to your beneficiaries or your estate.

If your policy provides future increases in the death benefit, you may want to ask how much the provider is paying you for the purchase of this benefit.

If your policy is a joint policy, or provides coverage on the lives of other family members or anyone other than yourself, there may be a possible loss of coverage.


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