When does a life settlement make the most sense?
The national life settlement trade association, Life Insurance Settlement Association (LISA), lists common reasons seniors sell their life insurance policies, including:
- A change in estate planning needs
- The life insurance policy is no longer needed or wanted
- Premium payments have become unaffordable
- Changes in financial and life circumstances (such as divorce, financial hardship, or death of a beneficiary)
- The policy is about to lapse or surrender
If the policy was purchased to ensure the availability of funds to pay off a mortgage, but the mortgage has since been paid, a life settlement becomes an option.
A policyholder also might wish to distribute the funds of his or her policy to family members and/or friends while still living.
Is the money I’m paying in premiums better off in a savings account?
Many term life insurance policyholders reach their term limit in their 50s and 60s and face the choice of converting their policies into whole or universal coverage. In a desperate last-minute retirement catch-up environment, many people might be quick to terminate their policy and transfer income they once reserved for premium payments into savings. However, when the return-on-investment of a life settlement is stacked up against two average-performing savings accounts, the results might surprise you.
The Lifeline Program® tested an alternative retirement strategy, similar to a reverse mortgage, and based on the idea of converting a term insurance policy into permanent coverage for the sole purpose of a life settlement transaction. Consider how two simple interest-bearing retirement accounts hold up in comparison to paying premiums in the same amount as a person would put into each of the competing instruments on a $1 million convertible term life policy. The term policy is converted into a whole life or universal life policy at the end of the 20-year term. The return on the life settlement out performs both savings accounts by a wide margin—by at least $50,000. The Lifeline Program® calls this the reverse insurance policy (RIP) strategy.
Can’t I just surrender my policy to the insurance company for a payout?
The Conning 2011 study found the average cash surrender value is only 10 percent of a policy’s face value. Another study, conducted by the U.S. Government and Accountability Office in 2010, revealed that consumers who sold their policies in a life settlement received an average of 700 percent more than if that same consumer had sold the policy back to the insurer for the policy’s cash surrender value.
How can one use the money from a settlement?
There’s no limit on how one can use cash from a settlement. One recent Lifeline Program® client used settlement funds to buy cattle for her grandson’s farm. Another client used his settlement to help pay for his ill mother-in-law’s at-home healthcare.
If a policyholder’s personal financial situation has taken a turn for the worse, affording premium payments can become a challenge. In this situation, a life settlement may provide funds to help pay for essential expenses and improve a policyholder’s lifestyle. Policyholders may use life settlement funds to pay down loans or other outstanding debts. Reducing and eliminating debt is the first step toward financial freedom.