Life Settlements Explained
What To Know About Selling Your Life Insurance Policy
What is a Life Settlement?
A life settlement is the sale of an existing life insurance policy for its market value.
When a life insurance policy is no longer needed or becomes unaffordable, the vast majority of policyowners lapse or surrender it back to the insurance company for little or no value. In a life settlement, policyowners receive a market value for the sale of their policy. Life settlements pay policyowners an amount that is, on average, 4 to 11 times more than if they terminated their policy, according to government and university studies.
Are Life Settlements Legal and Regulated?
Policyowners have a property right in their life insurance policy, including the right to sell that policy. The United States Supreme Court, in 1911, held that “life insurance has become in our days one of the best-recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property,” and that restricting a policyowner’s property rights to sell their policy was illegal and would “diminish appreciably the value of the contract in the owner’s hands.” Grigsby v. Russell, 222 US 149 (1911).
Today, 43 states regulate life settlements, covering over 90 percent of US population. These laws establish extensive consumer protections for policyowners, including licensing of life settlement brokers and providers, form approval, consumer disclosures, anti-fraud prevention and reporting and privacy protections.
Who Qualifies for a Life Settlement?
The following are the initial criteria to qualify for a life settlement:
$100,000 or greater
- Decline in health since policy issuance and/or
- Multiple health impairments
- Serious health condition not present when policy was issued and/or
- Unable to perform at least two Activities of Daily Living (ADLs) such as eating, toileting, transferring, bathing and dressing.
LightHouse Life appraises each life insurance policy based on information about the policy and the health of the insured individual. Policyowners participate in a brief, confidential telephone interview with LightHouse Life.
Should I Pursue Life Settlement & Sell My Policy?
Americans purchase life insurance policies for many reasons; to protect loved ones, to preserve wealth for younger generations, or for business purposes.
But the fact is that almost 90 percent of life insurance policies issued are lapse or surrendered during the lives of the policyowner.
Every year, seniors lapse or surrender more than $200 billion in life insurance death benefits that could have been sold via a life settlement for significantly more money than they otherwise received.
Policyowners pay years and years of premiums, creating value in their life insurance policies. Life settlements let policyowners capture that value for themselves – as opposed to giving that value to the insurance companies. Life settlements are like “found money” for seniors and their families to use today and to provide resources in retirement.
There are numerous reasons seniors might surrender or lapse a policy, including:
The Need for More Retirement Income
- Many Americans underestimate the amount of money needed to live comfortably in retirement. The costs of living, including housing, energy, healthcare, and long-term care are rising and it’s simply more expensive to live in retirement.
Life Insurance Policy Becomes Too Expensive
- Premiums on policies for older Americans often increase significantly, insurance companies raise COI (cost of insurance) rates on policies, or a policy’s cash surrender value has been depleted and the premiums due are too great to maintain the policy any longer.
The Policy is No Longer Needed
- There may be cases in which a life insurance policy simply isn’t needed. Seniors may have other successful retirement planning in place or the financial risk that existed when they took out the policy may no longer exist, eliminating the need to keep the policy.
Starting the Life Settlement Process
A life insurance policyowner who is interested in selling their policy will work with a life settlement company like LightHouse Life, a licensed purchaser of life insurance policies.
The process of selling a life insurance policy is straightforward, simple and easy.
To determine if a policy has a market value, the policyowner works with the life settlement company to provide information about the policy and health of the individual insured under the policy. LightHouse Life works directly with the policyowner during a brief telephone interview to collect information about the insured’s health and the policy. LightHouse Life then evaluates the policy and provides an appraisal of the policy’s market value and, if qualified, an offer to purchase the policy.
The Life Settlement Transaction Timeline
Qualifying for a Life Settlement
Policyowners participate in a brief, confidential telephone interview to share information about the policy and the health of the individual insured under the policy. In some cases, additional information may be obtained from the insurance company and health care providers.
LightHouse Life protects the privacy and confidentiality of the information it obtains and complies with all applicable Federal and state laws and regulations, and our own privacy protection policies and procedures.
The Life Settlement Offer
LightHouse Life provides a free appraisal of the policy’s market value within 5-7 business days after receiving the health and policy information, including an in-force projection of future premiums, and if qualified, LightHouse Life will make an offer to purchase the policy. Offers to purchase a policy will always be greater than the policy’s cash surrender value (if applicable), and include important disclosures and other information that will assist policyowners in making the best decision regarding the fate of their policy.
In addition to a lump sum offer to purchase the policy, LightHouse Life may be able to offer the policyowner the ability to retain a portion of the policy’s death benefit for their beneficiaries and still receive proceeds from the policy sale.
Acceptance and Closing
Once an offer is accepted, LightHouse Life works with the policyowner to complete the sale of the policy and deliver the proceeds of the sale to the policyowner. LightHouse Life will prepare and send a package of approved forms* which include the terms of the sale, disclosures about the transaction, and the policyowner’s rights under the law. The policyowner will then have time to review, complete, and send back the documents. The policyowner can decide to receive the documents electronically or in hard copy.
Once all the documents have been executed and returned to LightHouse Life, prior to closing the full amount of the purchase price of the policy is placed into an escrow account with a national bank. Once the insurance company changes the ownership of the policy and notifies the escrow agent, which typically takes 15-30 days, the proceeds are then released to the policyowner.
Policyowners can receive the proceeds from the sale of their policy in as little as six weeks.
How Valuable is My Life Insurance Policy?
Here’s some important and valuable information about selling a life insurance policy:
- An offer to purchase a policy must be greater than the policy’s cash surrender value and any accelerated death benefits that may be available at the time of purchase.
- Policyowners might be able to retain a portion of their policy, selling only part of it’s death benefit, without having to pay any further premiums. This is a way for policyowners to continue to provide protection for loved ones without having to incur any future premiums.
- Policyowners should know how much and from whom all brokers, advisors and agents are being compensated. There should be no hidden costs or expenses in a life settlement transaction.
- Policyowners should understand how the sale of the policy is going to be taxed. If the insured person under the policy is terminally ill or chronically ill, the life settlement proceeds may be tax free. Policyowners should seek advice from a tax professional.
- The proceeds from a life settlement must be paid in a lump sum. In other words, the proceeds of the sale cannot be made in installments.
- Carefully read all documents, including the risk and transaction disclosures that are provided. Ask all questions you may have.
How Will My Life Settlement Be Taxed?
The Tax Cuts and Jobs Act of 2017 specifically addressed how the proceeds from the sale of a policy are computed:
- Proceeds received up to the policy’s tax basis are free of income tax. The tax basis of life insurance policies is equal to the total premiums paid less the amounts received under the policy that are excludable from gross income, such as the return of premium via dividends for whole life policies.
- Proceeds that are greater than the tax basis, up to the amount of the cash surrender value, are taxed as ordinary income tax rates.
- Proceeds that are in excess of the cash value are taxed at long-term capital gains if the policy is held more than one year.
Policyowners are advised to consult their tax advisor prior to selling a policy.
Are Life Settlements Regulated? If So, How?
Life settlements are one of the most transparent and secure financial service transactions in the United States and are both well-regulated and highly-regulated by state insurance laws and regulations. Currently, 43 states regulate life settlements, covering over 90% of the US population.
The National Association of Insurance Commissioners reports that since 2015, only TWO consumer complaints have been reported to insurance regulators throughout the United States.
Among the key consumer protections in life settlement laws and practices are:
- Life settlement companies are required to protect the personal identifying, financial, and health information of policyowners and insureds.
- Life settlement companies and brokers must be licensed by state insurance departments and must use state-approved forms and must establish anti-fraud plans.
- Important disclosures are provided to the policyowner throughout the life settlement transaction including information about their current life insurance policy, recommended ways for the policyowner to keep their policy, along with transaction-specific information.
- Individuals who sell policies on their own lives must be determined to be competent by their own physician prior to entering into a life settlement.
- The policy’s beneficiaries (family members, trusts, etc.) are made aware of and acknowledge the life settlement transaction.
- All life settlement proceeds due to the policyowner are held in an escrow account at a national bank after the contract is executed until the insurance company records the sale and the policy’s new ownership.
Why You Should Choose LightHouse Life
We believe that seniors should benefit from their life insurance policies and that life settlements help the financial lives of seniors.
LightHouse Life’s mission is to provide value to life insurance policyowners through life settlements. We operate with the highest standards of professionalism and transparency in the life settlement market. We are committed to making life settlements accepted and accessible to American seniors and their families because life settlements provide them with life-changing resources.
LightHouse Life’s Commitment to Policyowners:
- To treat policyowners and their loved ones with respect.
- To provide fast and free estimates of the value of life insurance policies.
- To be fully transparent throughout the life settlement transaction.
- To offer policyowners a market value for their policies.
- What is a Life Settlement?
- Are Life Settlements Legal and Regulated?
- Who Qualifies for a Life Settlement?
- Should I Pursue Life Settlement & Sell My Policy?
- Starting the Life Settlement Process
- The Life Settlement Transaction Timeline
- How Valuable is My Life Insurance Policy?
- How Will My Life Settlement Be Taxed?
- Are Life Settlements Regulated? If So, How?
- Why You Should Choose LightHouse Life