People have different needs for their life insurance policies. At some point, those who have a life insurance policy may no longer require it. Instead of being stuck with a life insurance policy that does not benefit them the same way that it used to, these individuals can monetize their life insurance policy through something that is called a life settlement. This allows them to enjoy the benefits of their life insurance policy while they are still alive.
Certain life insurance policies are property of the insured. This is in contrast to a term insurance policy where the owner is essentially renting the policy for a set period of time. Each life insurance policy has a value attached to it that is called the surrender value of the policy. This value is an amount that is paid to you in the event that you terminate the policy and no longer make payments. The surrender value represents the savings part of the insurance policy since the policy incorporates both an insurance component as well as a savings element.
When a policyholder may no longer need the insurance policy, they have options beyond simply unilaterally terminating the policy. There is a market of investors who may want to buy the policy, meaning that the insured can sell the policy instead of forfeiting it. The value of the policy is going to be higher than the surrender value, but lower than the overall amount of the insurance. An investor will not want to pay $1 million now to receive $1 million at some point in the future. This is because there is both inflation as well as an opportunity cost to money. The investor will need to calculate how long they think that the insured will live along with the rate of return they believe that they can get on their money if it is invested elsewhere. Unlike the traditional life insurance industry, life settlement investors want to find policyholders that will not live for a long time after the life settlement is reached because they receive their money faster.
Policyholders may have an incentive to sell their life insurance policies while they are still alive. At some point, they may feel that their loved ones have sufficient resources to carry on once they are no longer here. At the same time, the cost of carrying the insurance policy may have increased relative to the resources necessary to make the payments. Finally, there could be either a need or a want that the insured may have that could necessitate the use of that money in their lifetime. There is nothing that precludes the policyholder themselves from benefiting from their own life insurance policy. Those that just let their policies lapse when they cannot or do not want to make the payments are leaving money on the table.
There is an entire industry that has sprung up that negotiates life settlements with policyholders. These are regulated industries that have certain protections in the event that an insured decides that they want to sell their policy. For example, many states impose a two-year waiting period before the insured can enter into an agreement. There is an industry association that prescribes a code of ethics to which members must adhere. When considering a life insurance settlement, it is best to deal with members of the Life Insurance Settlement Association. Brokers can help guide policyholders to the best possible deal for them. It is important to note that, while the amount received will be greater than the surrender value, there will be some profit in the investment for the life settlement company. Therefore, it is not realistic to expect payment for a life insurance policy in an amount close to the payment amount of the insurance policy.
The best thing that one who is considering a life insurance settlement can do is shop around. There are many different prices and settlements out there, and the best way to understand a fair price is to talk to more than one company. This will lend additional transparency to the marketplace and enable policyholders to compare terms before they enter into any agreement.