A life settlement is a process wherein a policyholder sells his life insurance policy to a third party in exchange for cash. The money that the seller gets is more than the surrender value of the cash. However, it’s less than the death benefit. Buying life settlements have gained much popularity in the past decade, especially among seniors who no longer need their policy.
REASONS WHY PEOPLE SELL THEIR POLICY
There can be many reasons why people choose to sell their policy since selling the policy for a life settlement results in getting instant cash in return. Here’s a list of reasons why people sell their policy for a life settlement.
- Many seniors acquire a life settlement in order to take care of their medical expenses. As people age, there is a need to go for regular checkups. This results in great expenditure. The money people get by selling their policy can help them deal with expensive medical bills.
- As the policyholder ages, the cost of the premium also increases. Gradually, the premium costs get so high that it becomes very difficult for seniors to pay for the premiums. This is when selling the policy becomes an ideal option. Once the policyholder sells his policy, the buyer takes care of the premiums until he gets the death benefit.
- Seniors also choose to sell their life insurance policy when the beneficiary, that is, a spouse or their loved one, passes away. When that happens, the policyholder no longer needs the policy since the person who is entitled to get the death benefit is no longer there.
- When the current policy does not seem useful, people choose to sell their existing policy in order to buy a new policy.
- Life settlements prove to be a blessing for people who retire but don’t receive pensions to afford life after retirement.
With that being said, when you decide to sell your life insurance policy for whatever reason, there are a few steps that a life settlement transaction follows. Here’s a list of steps after which you get a life settlement in exchange for your policy.
MAKING A DECISION
For most transactions, decision making comes somewhere in the middle of the process. However, when you plan to sell your policy for buying life settlements, the first thing you have to do is evaluate your policy and look for alternatives. You can do this with the help of a financial advisor. Moreover, once you figure out that a life settlement is the best option, you decide to get it by selling your policy to a third party. Next up, you can look for a licensed life settlement provider to help you proceed.
Once you choose a licensed provider, they will gather the needed information about the policy and your health in order to figure out if you qualify for a life settlement. The life settlement provider would also need access to your medical records using which, he would estimate your life expectancy to find out the cash value of your life settlement.
After that, the company does a detailed analysis of your policy and makes an official offer. This is done upon assessing all the data, like medical records and the details of the policy so that the life settlement company can make a formal life settlement contract offer.
EVALUATING THE OFFER
Now that you have the formal offer from the life settlement providing company, it's your task to analyze the offer and see if you think the life settlement amount is worth your policy. When we talk about this step, you can either take the offer or walk away. Assuming you take the offer, you must tell the provider that you accept the offer in order to proceed with further steps.
THE CLOSING PACKAGE
Once you accept the offer for buying life settlements, the licensed provider sends you a life settlement contract that is known as the closing package. It consists of a few documents that the provider would explain to you. Once you know what the documents state, you're supposed to sign them. Signing these documents initiates the process of transfer of ownership.
TRANSFER OF OWNERSHIP
Once you sign the closing package, the signed documents are sent to the insurance company by the provider, requesting transfer of ownership of the policy. An escrow agent is appointed to safely keep the funds that are to be paid in exchange for the policy upon completion of the transfer of ownership.
ACKNOWLEDGMENT AND RELEASE OF ESCROWED FUNDS
Once the insurance company completes the transfer of ownership from the policyholder to the buyer, both the insured and buyer get a confirmation. The confirmation is also forwarded to the escrow agent, which is when the escrow agent releases the funds to the former policyholder in exchange for the life insurance policy.
This is the entire process- starting from considering a life settlement to receiving a life settlement after selling one’s life insurance policy. It's always recommended to shop around for offers but never take the first quote that is offered. This is because there is no definite value of a policy for a life settlement. Each buyer quotes his own price, and it's up to the policyholder whether or not he would take the offer. Another thing, it's highly recommended only to select a licensed provider so that you can be sure that the provider is regulated by the state. This adds credibility and reliability to the transaction.
Since the money you get from a life settlement may be taxable, it’s also important to seek legal or financial advice from a professional. Make it a point to hire a financial advisor who can help you understand the tax calculations. While buying life settlements, when you choose a licensed provider, the best offer, and a financial advisor; you can get a justifiable amount of cash for your life insurance policy. Just make it a point to be involved in all the steps and keep yourself educated about the different aspects of life settlements before taking the dive.