Life insurance settlement is a process wherein an insured person agrees to sell his or her unwanted insurance policy to another party for a cash lump sum, instead of returning it to the company where he acquired it. After making the payment, the purchasing party becomes the beneficiary of the policy. From thence, the buyer is the one responsible of paying the rest of the premium until the seller dies and he collects all the benefits.
A life settlement provider serves as the chain that leads the seller of the life insurance policy to its actual buyer. It is also the life settlement provider’s task to ensure that the whole transaction runs smoothly. Outside vendors might be involved. But most of their job focused is mainly on helping out in the more specialized functions within the transaction.
The sellers of the said life insurance policy are usually senior citizens aged 65 years or older. The life expectancy of these individuals could be anywhere from two to ten years. And they are looking to sell their life insurance policies mostly due to the rising cost of healthcare and nursing home, among many other reasons. For most of them, it is better to sell their insurance policies and get money out of it instead of adding the premium to their incurring monthly expenses. There’s only one general rule when selling policies – they’ve got to be worth at least $100,000. Convertible term contracts, whole life, and universal life insurance policies are normally accepted.
It rarely happens that the owner of the policy, who is often times a senior citizen, is the same person who handles the transaction. More often than not, the transaction is carried to with the help of their respective financial advisors. Selling life insurance policies is somewhat unconventional. And most senior citizens, given their age and physical abilities, don’t want to be involved or concerned with the conditions transpiring the policy and its sale. The usual financial advisors seen assisting senior citizens in this particular matter are CPA’s, attorneys, financial planners, estate planners, CSA’s, and charitable trust officers.
Brokers may or may not be involved in the transaction. It is the sole discretion of the client to require the services of a broker. If the choose to, they can merely ask their financial advisor to directly submit the life insurance policy to the settlement provider. The main job of the broker in life insurance settlement is to come up with the best market value of the insurance being sold. What brokers really do is submit the policy to different life settlement providers and have them bid on it. It is still part of their job to negotiate with the high bidders and seal off the deal. The brokers have to be duly licensed to perform this task.
The life settlement providers can be considered as the key players in these transactions, as they assume the role of the investor. They are the ones who pay the policyholder outright the assessed cash value of their policy. And most of the time it is in an amount bigger than the policy’s cash surrender value. Life insurance settlement providers are big, well backed-up companies that have access to institutional funds coming from major banks.
There are other parties involved with life settlements who facilitate the transaction. Underwriters are also needed to provide the investors with a feasible estimate of the life expectancy of the insured for optimum pricing. And aside from them, commercial banks are also involved in the transaction. Their job is to provide the funds that life insurance settlement providers need to pay the policyholders.
To understand it better, here is an illustration of how the whole transaction works: First, the senior citizen who wants to sell his or her policy consults his financial advisor about it. Then the client, as represented by his financial advisor, commissions a broker to mediate with the rest of the settlement providers. Upon receipt of the policy, the broker submits it to all institutional providers. The providers that received the policy would review and qualify the policy. If it successfully meets all criteria, an offer will be sent back to the broker. The broker presents those offers to the client so he can chose accordingly. After which, both the client and his financial advisor start to prepare the necessary documents requested by the provider. And then the provider commissions an escrow service and places the payment for the policy to them. The provider then acts to change the ownership forms and takes them to the carrier of the insurance policy. When everything is completed, the money is released to the seller.
There are several instances why life insurance settlement transactions prove to be the better option than the next best alternative. The most common scenario is estate reduction. Senior citizens reduce their estates by writing off the cash surrender value or CSV of their policies. On the surface, this seems to be the best option. But if they choose to deal with a life insurance settlement provider, they would realize that they are able to receive more than just the CSV for their policy.
The sale of a corporation may also require the services of life insurance settlement. When a certain company is sold to another person, all corporate-owned policies are always part of the deal. But not all buyers would like to take the insurance policies due to estate planning reasons. In this case, settling with a life insurance settlement provider would be their better choice.