Understanding the Life Settlement Process

Breaking Down the Life Settlement Process

In a life settlement, an individual sells their life insurance policy to a third-party investor in exchange for a lump-sum payment. It’s important to understand the life settlement process to make an informed decision about whether selling a life insurance policy for a lump sum payment is a viable option. The life settlement process typically involves four basic steps.

What Are the Steps?

Step One: Applying and Underwriting

Identify the life settlement company you’d like to work with, then file an application with the company. You will be required to provide personal details and access to your medical information. The life settlement company’s underwriters will use your personal and medical data to create a life expectancy report for prospective buyers. 

Step Two: Researching Buyers and Receiving an Offer

Your life settlement company will compile a list of potential buyers. Each prospective buyer will present a financial offer for your policy. You accept the best offer. 

Step Three: Closing the Sale

Your broker will assemble a closing package with all the necessary documentation to complete the sale. Your buyer will put money in escrow until the transaction is finalized. 

Step Four: Receiving Your Money

Once you and the buyer agree to the terms and close the transaction, your buyer becomes the new policy owner. The escrow service will release the funds to you. Any broker’s fees will be paid automatically out of your funds by your escrow agent. 

Before selling your life insurance policy, make sure you know its current cash surrender value. A fair buy offer will provide you a meaningful premium above the cash surrender value. The offer is likely to fall notably short of the policy’s death benefit, but it should offer you more than you can obtain by simply surrendering the policy back to the issuing insurance company.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

What Parties Are Involved in a Life Settlement?

Life settlements may involve various parties, depending on individual needs. Here are some of the key players to be aware of:

Who Is Involved in a Life Settlement?

Policy Owner

This is the person who originally bought the policy. In this case, you are likely the individual who initially purchased the policy.

Advisors

They are professionals who help you determine if a life settlement deal is right for you.

Life Settlement Companies

These firms specialize in purchasing life insurance policies from sellers.

Life Expectancy Underwriters

They are analysts who work for life settlement companies. They use statistics and data, such as your age and overall health condition, to gauge your life expectancy.

Life Settlement Providers

These are companies or private investors that purchase life insurance policies from current owners. 

Investors

Just like providers, they are people who purchase life settlements from policyholders.

Escrow Agents

Escrow agents play a crucial role in facilitating life settlements by collecting and validating documentation and holding funds until the sale is completed.

Read More: Life Settlement Options

What Happens Once Your Policy Has Been Sold?

If you are wondering what happens after selling your policy, below are some answers to frequently asked questions.

How Long Will the Buyer Hold the Policy?

The individual who purchases your policy will own it until one of the following events occurs:

• You die and they receive the insurance payout. 
• They surrender it to the insurance company for its cash value.
• They sell it to another buyer.

Can the Buyer Resell the Policy?

Yes, if a buyer decides to resell the policy they bought, they can do so using the same process they followed to buy it from you. 

What Happens to the Death Benefits?

If you sell your life insurance policy, your family won’t receive any benefits when you die. Instead, death benefits go to the new owner. 

Do You Have To Pay Premiums?

No, your obligations end once you sell your life insurance policy. The new owner assumes responsibility for paying the premiums on the policy.

Can You Change Your Mind?

Yes, you can change your mind and reclaim your policy if you’re within your state’s rescission period. The rescission period is the time frame in which you can cancel the life settlement contract. The period usually starts after you receive the money from your life settlement and extends for a specific number of days.

Rescission periods vary from state to state. For example, New York’s rescission period is 15 days, while Oregon’s is 30 days.

However, if you rescind the sale, you must repay all the money you received in exchange for the policy. You also must refund the buyer for any premiums they paid on the policy during the time they owned it.

Things To Keep in Mind During the Life Settlement Process

When selling your payments through a life settlement, there are several factors to consider. Take your time during each stage of the process, and do not hesitate to ask questions as you move through it.

Important Considerations

How Do You Find a Reputable Buyer/Broker? 

In most states, life settlement brokers must be licensed. You can find a reputable buyer through a broker.

What Are the State Regulations?

Each state has its specific life settlement regulations. You can learn more about your state’s laws here. 

What Is the Buyer Doing With Your Policy?

Typically, the purchaser will view your policy as an investment and will retain it while awaiting the collection of the associated death benefits after your passing.

How Do You Protect Your Policy?

Work with a reputable investor or life settlement company. Don’t sign any documents unless you know exactly what you’re agreeing to. 

How Do You Avoid Scams and Fraud?

Always work with experienced and licensed life settlement brokers. Check to make sure they’re licensed by the state and read online customer reviews about them.

What Are the Tax Consequences?

Depending on your health status and how much you receive from the sale of your policy, your life settlement funds may be tax-free, or they may be subject to ordinary income tax or capital gains tax. This is a question to ask your tax preparer before completing the sale. 

What Are the Potential Legal Implications?

Life settlements made privately or through unlicensed brokers may be against the law in your state. Always check your state laws before selling your policy.

How Do You Make the Best Decision for Your Needs?

Consider your immediate cash flow desires and your family’s expected financial needs after you die. If you have enough assets to keep your loved ones comfortable after you pass, selling your life insurance policy could free up cash you can use for your bucket list or anything else you want to spend it on. 

Read More: Life Settlement FAQs

Resources for Those in the Life Settlement Process

For further information on the life settlement process, please refer to the resources listed below.

Life Settlement Process Resources 

• Filing a Complaint: FINRA: File a Complaint
• Variable Life Settlement Transactions: FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities
• Selling Existing Variable Life Insurance: FINRA: Member Obligations With Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties
• Exchanging an Existing Policy: Should You Exchange Your Life Insurance Policy?
• Viatical Settlements: Selling Your Life Insurance Policy: What You Should Know About Viatical and Life Settlements