What is a Life Settlement and How Much is My Policy Worth?

Clifford PendellWritten by Clifford Pendell, Managing Partner and Co-founder

If you have a life insurance policy that you no longer need, or can no longer afford, you may have some life settlement options.

If you qualify, a settlement company will provide you with a lump-sum of cash or fund an annuity in exchange for the ownership rights to your life insurance policy

This article outlines the factors a life settlement company will consider when determining if your life insurance policy is worth buying. 

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What is the purpose a life settlement?

A life insurance settlement option, or life settlement, provides a policy holder with cash or an income stream in exchange for the ownership rights to their life insurance policy. This can be a great asset for someone that no longer needs their life insurance or is struggling to make the payments.

Unfortunately, not everyone will qualify for a life settlement option. There are a variety of factors that a life insurance settlement company will evaluate before deciding if they are willing to make an offer. These factors will also have an impact on how much your policy is worth.

How Do Settlement Companies Determine What My Policy is Worth?

A life settlement company will review the following factors when reviewing your insurance policy:

Your Age – The older you are, the more valuable your policy will be. In general, life settlement companies prefer to work with clients that are a least 55 years of age or older, unless they have serious health concerns.

Your Health – If you have serious health issues, a life insurance settlement company will consider your application at any age. Those that are in fair need to be at least 55 years or older, if you are in average or better health this jumps to age 70.

Coverage Amount – The more coverage you carry, the more your policy is worth to a life settlement company. Most insurance settlement companies will not consider an applicant with less than $100,000 of coverage.

Type of Policy – Unless you are in extremely poor health, or over age 80, you must have a permanent life insurance to be considered for a settlement offer. Thankfully, some term policies can be converted until age 70 or 75 depending on the provider. Group coverage through your employer is not eligible.

Premiums – A life settlement provider will also evaluate the annual cost of your life insurance policy. The lower your premiums, the more their settlement offer will be. Those that purchased their policy when they were younger and in good health will have a larger payout.

Typically, settlement providers will offer up to 25% of a life insurance policy’s death benefit in ideal circumstances. To learn more about your options for a life settlement offer, please give us a call at: 800-247-9555 to speak with one of our experts.

What Are the 5 Life Settlement Options for Life Insurance?

There are 5 common life settlement options in the life insurance industry. We have further explained each of these below:

1. Lump Sum – With a lump sum the policyholder receives a one-time value for the agreed upon value of their policy. This is the simplest and most straightforward option. Taxes are assessed based on how much of your settlement exceeds what you have paid into your policy in premiums.

2. Fixed Period – In this scenario, the policyholder receives monthly or annual payments from their life settlement company for a fixed number of years. Most fixed periods are one to 30 years depending on the policyholder’s age and income requirements.

3. Life Annuity – A life annuity provides the policyholder with a fixed level of income for the rest of their life. This could be advantageous for those that live past their lifetime expectancy, but the payments will stop when you die, and this could be problematic those that depend on you for an income.

4. Life Annuity with Period Certain – This option provides the policyholder with a fixed level of income for the rest of their life and guarantees payments will continue for a set number of years if the policyholder passes away before expected.

5. Interest Only – In this situation, the life settlement company takes ownership of your policy and pays you quarterly payments based on current market conditions and your settlement factors. If you choose interest only, you can still change to another settlement option in the future.

The best settlement option depends on the individual and what the settlement company is willing to offer. For an anonymous consultation, please give us a call at 800-247-9555. One of our experts can provide you with the information you need or refer you to someone who can.

Am I Eligible for Life Insurance Settlement Options?

To determine your eligibility for life insurance settlement options, a settlement company will send you a questionnaire to assess your overall health. Some may also ask to review your medical records before making an offer. There are laws in 45 states that regulate this process to protect consumers.

Some of the questions you can expect include a self-assessment of your health and the health history of your immediate family, as well as some specific questions about diabetes, cancer, heart disease, tobacco and alcohol use, sleep disorders, kidney disease, strokes, and respiratory issues.

If you are in excellent health, and under the age of 65, it will be extremely difficult to find any life insurance settlement options for your policy. This is especially the case for policies with less than $500,000 of coverage.

Life Settlement FAQs

Here are some of the most common questions we receive from potential clients that are considering their options for a life settlement:

How much do life settlements pay?

The amount of pay someone can expect from settling their life insurance policy depends on a variety of factors including the policyholder’s age, overall health, amount of coverage, and policy type. With that being said, an ideal life settlement client should expect around 25% of their policy’s face value.

Are life settlements a good idea?

If no one relies on you for financial support, a life settlement can provide you with an income while you are living to help you live life to the fullest. However, if your loved ones are depending on your life insurance, consider other options like asking family to help pay for the cost of your coverage.

How does a life settlement work?

If you meet the qualifying conditions, a life settlement company will offer you money in exchange for the ownership of your life insurance policy. Usually, these offers are reserved for seniors and those with serious health issues that affect their longevity.

Who qualifies for a life settlement?

Life insurance settlement options are usually reserved for policyholders over the age of 75 with at least $100,000 of coverage in force. If you have some serious health issues and have owned your life insurance policy for at least 2 years, you could also be eligible for a life settlement.

Are life settlements taxable?

A life settlement is taxable if the amount of money you receive from your settlement exceeds the premiums you have paid into the policy. If so, this amount will be taxes as ordinary income and must be reported on your tax returns using IRS form 1099-LS

The Bottom Line

Depending on your age and overall health, you might be able to sell your life insurance policy to a life settlement company. The value of your policy is based on a variety of factors that also include the type of coverage you have, the amount of your death benefit, and the annual cost of your policy. 

This can provide you with a lump sum of untaxed cash while you are still alive. The downside is that your loved ones will lose the coverage they could be relying on when you pass away. While a life settlement isn't for everyone, it could be your best option if you no longer need your life insurance, or can no longer afford it. 

To learn more about life settlements and determine if your policy is eligible, give us a call toll-free at 855-247-9555 to speak with one of our experts. We've helped thousands of families and businesses with their life insurance needs and we can help you too.

Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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