What is a life settlement for a life insurance policy?


A life settlement involving a life insurance policy refers to your act of selling your policy to a third party who will then be the ones who will collect the life insurance proceeds upon your death. This can be the option that life insurance policy holders can take when they are in need of cash.

A life settlement will usually be bought for a price that is higher than the policy's current cash value or cash surrender value, but lower than the expected death benefit. A life settlement is different from a viatical settlement, in that the viatical settlement is transacted by a person who has a critical or life-threatening illness.

What happens is that the policy owner assigns ownership of the policy to the third party or names the third party as its beneficiary. The third party will then be responsible for ensuring that the policy does not lapse by paying for its premiums.

Life settlements are usually made by policy owners over 70 of age or who have a serious health problem. They would rather have the money at the time they need to pay for hospital bills and medical costs than when they have already passed away.

Aside from these, other reasons that people enter into a life settlement would be:

  • That the insured can no longer afford the premiums
  • The insured is thinking of surrendering the policy (with a life settlement, he stands to get a higher amount)
  • The policy premiums have not been paid and the policy is on the verge of lapsing
  • The insured person no longer needs it due to a change in his status or financial circumstances. For instance, the married couple has divorced, or there is a change in the person's estate planning needs.

Please be advised, though, that when you get into a life settlement, and you later find that you need life insurance, you will have to pay higher premiums for the same amount of coverage. Thus, before you go into a life settlement, you should also look into other alternatives:

  • You can ask your life insurance company if the policy can be converted to a lower coverage in such a way that you don't have to pay any more premiums but are covered for a smaller policy amount
  • You can ask your life insurance company if you can get a policy loan based on the policy's cash value
  • You can ask your family if you can get a loan using your policy as collateral
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