How Do Life Settlements Work?


A life settlement is the exchange of a life insurance policy for a lump sum of money. This transaction is usually the sale of the policy, by the policyholder, to a third party who could be a person or an entity—asides the company that issued the policy. Life insurance policies are usually sold by elderly people—usually over 60—or people who have a life expectancy of two to 10 years.

The amount received varies with the viatical settlement provider but is generally more than the policy’s cash surrender value and less than its net death benefits. Before considering selling your life insurance, you should learn as much as you can about how life insurance works as this article focus on the sale of life insurance.

Settlement Terminologies

Some words and terms are commonly used in this field, and prior knowledge of them will ease your understanding of the settlement process.

  • Settlement provider: This is a third party, either an investor or company that buys life insurance policies. A settlement provider could either resell to another entity or maintain the policy for the benefits when the holder passes on.
  • Net death benefits: This is the financial benefit that the policy provides the holder once he/she passes on. It is usually in the form of cash paid by the insurance company that issued the policy.
  • Cash surrender value: This is the cash value of the insurance policy i.e. it is the amount the policy is worth if the policyholder decides to cancel the policy.
  • Lapse: This is when an insurance policy is terminated due to defaults in payment of insurance premiums by the policyholder.

Life Vs Viatical

You may have heard of a viatical settlement and wondered what the difference was. The only real difference between them is that the policyholder of a life settlement has a longer life expectancy. Policyholders in viatical settlements usually have a terminal illness. A life settlement provider is usually the same as a viatical settlement provider.

Why Sell Your Policy?

There are several reasons why a policyholder would want to sell his life insurance. It could be that the policy no longer caters to his needs or that the premiums have become unaffordable due to retirement—when this happens; the policyholder tries to avoid a lapse on his insurance policy.

It could also be that financial circumstances change and the policyholder needs cash urgently, or the policyholder wants to switch insurance policies and is thinking of using the money derived from the sale to purchase a new policy. This is not always the best as an elderly person could be charged higher premiums due to age and life expectancy. There are things to consider if you wish to change your life insurance policy.

Whatever the reason for selling, there are things you should consider before selling your life insurance, such as:

Availability of alternatives: If you’re selling your policy because you cannot afford the premiums on your current policy, then there are alternatives to selling it. You can seek accelerated death benefits if you have a terminal illness or you can change your insurance policy to a lesser, more suitable one.

Price: The amount received for an insurance policy depends on the settlement provider. Before selling your insurance policy, you should shop around to get the best prices. Alternatively, you can hire a broker who shops your policy to settlement providers to get the best deal.

Dependents: If you have a family that depends on you, then selling your life insurance policy may not be the best option, especially if you are already in a difficult financial situation. The profits gotten from a life settlement are usually not up to its net death benefits, so your family might be better off having the policy in place.

Where to Sell

A life settlement or viatical settlement provider usually buy life insurance policies. They are companies that buy these policies and can either resell them or offer interest from several policies to investors. When choosing a company to sell to, ensure that they are registered and that their terms are in your interest. Again, don’t hesitate to back out of a deal if you don’t feel satisfied.




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