What is a Life Settlement?
A Life Settlement is the sale of an existing in-force life insurance policy to a third party via the secondary institutional market in exchange for an immediate lump sum cash payment that’s less than the policy’s face value, but higher than the policy’s cash surrender value. The settlement amount is, on average, 4x the cash surrender value (CSV) of the policy – and by selling the policy, the owner is relieved of all future premium payments.
Historically, life insurance has provided a solution for the Policy Owner to meet various family or business needs, but over time, needs change. Until recently, if an insurance policy was no longer needed or financially feasible, there were only three options to consider: (1) allow the policy to lapse; (2) continue to pay premiums and keep the policy in place; (3) surrender the policy to the insurance company for the cash surrender value.
Now, thanks to the increasingly competitive Secondary Market, life insurance is no longer treated as just a Death Benefit. Like stocks, bonds, real estate and other investment holdings, life insurance has become a fully evolved asset with a TMV (true market value) – an asset which can be sold by its owner at the highest market price.
All policies are eligible for a Life Settlement including Term Life, Universal Life (UL) and Variable Universal Life (VUL), Survivorship and Whole Life, with the general rule of thumb being that the insured needs to be 70 years old with a minimum of $500,000 of insurance.
The settlement amount will be determined by a combination of:
- Policy type
- Policy face amount
- Insurance company rating
- State of residency
- Policy premiums/year
- Age, gender and life expectancy of insured