A life settlement is the financial transaction in which a senior citizen sells their unwanted or unneeded life insurance policy to an institutional third party for more then its cash surrender value. The insured receives cash now for the policy. The institutional investor, or purchaser becomes the new owner and beneficiary of the policy. The purchaser will continue to pay the premiums from the time of the sale to the insured passes away. Upon the death of the insured, the purchaser will collect the benefit.
Life settlements are available to all senior citizens over the age of 65 with an inforce insurance policy, usually with a death benefit of over $250,000. In every life settlement transaction the insured’s life expectancy will be obtained using underwriters who use the insured’s medical records and mortality tables. Based on these life expectancies and the cost of the insurance per year to keep the policy inforce to age 100, the institutional investors will make offers on the policy that are always above the cash surrender value of the policy but less then the death benefit.
Should the insured accept the offer from the purchaser, the insured will sign over the ownership and beneficial interest in the policy for the agreed upon purchase price. The money received by the insured for the sale of an insurance policy is tax free up to the amount of premiums paid into the policy to date by the insured. The excess is considered long term capital gains.
For example, a male insured, age 70, in average health recently had a $750,000 universal life policy with a cash surrender value of $5,000,which he took out 20 years ago as a protection for his children’s college educations should he pass away. As his children are now grown, he longer needs the coverage. An institutional buyer recently purchased this unneeded policy for $77,700 or $72,700 more then its surrender value. Clients can expect offers, such as this one which are substantially larger then the policies surrender value.
A life settlement is not only valuable for seniors who no longer need or want their policy, but also for insured’s whose policy has become cost prohibitive but the need for coverage still exists. Seniors can utilize life settlements by selling their existing, cost prohibitive policy and use the money from the purchase to buy a new policy of the same death benefit but with extra cash in the policy the premiums will be lower. This is called insurance re-finance.[ratings]