What is a life settlement (LS)?
It’s simply the sale of a life insurance policy to a third person or corporate buyer.
LSs are for someone who purchased a life insurance policy, no longer needs that particular policy (for a variety of reasons discussed below), and would like to sell the policy today for cash and use the proceeds for any number of different purposes.
Why sell a life insurance policy?
We think a better question is why keep a life insurance policy you have no need for. There are two main reasons people buy life insurance:
To protect the family in case the “breadwinner” (parent who makes the most money) dies.
To pay for estate taxes so wealth can be passed to the heirs at the second spouse’s death.
Let’s look at a few real-world examples of people who no longer need their life insurance policy.
If someone bought a life policy to take care of a spouse, but the spouse died first, then the need for the policy no longer exists and is then a candidate for a life settlement. The same would be true if the life policy was purchased for the spouse’s benefit and then the couple divorced.
If someone wanted to pass wealth to their heirs (children) and then the children turn out to be heroin addicts or otherwise become estranged from the family. In this situation, the insured might decide to cut the children out of the will altogether or, at the very least, simply do not want a large death benefit to pass to the undeserving children. If someone bought a policy to benefit a child upon the death of the parent except the child died first.
Other reasons to sell a life insurance policy
The main other reason to sell a life insurance policy is that you can’t afford to pay the premiums and you need cash. This is a common occurrence with the elderly who did not plan well for retirement and have increasing medical expenses. Many have life insurance policies they’ve been paying premiums into for years. Instead of surrendering the policy for cash, the insured may be able to receive significantly more money by selling the policy.
Summary of Life Settlements
While the topic of Life Settlements is not in the mainstream, it can be a valuable tool when looking at someone’s overall estate/financial plan.